"Among the weblogs, the best coverage of the Churchill controversy has been in View from a Height..." -Dave Kopel, Rocky Mountain News

"In Colorado, the Rocky Mountain Alliance of Blogs is covering the hot GOP primary between beer magnate Pete Coors and former Rep. Bob Schaffer with a great deal more insight than the Denver newspapers." -John Fund, OpinionJournal.com

"The Rocky Mountain Alliance offers the best of what the blogosphere has to offer." -David Harsanyi, Denver Post
Joshua Sharf

 notify list
to receive email when this site is updated, enter your email address:
 recent posts
Blogging 26 entries
Book Review 9 entries
Business 96 entries
China 2 entries
Colorado Politics 55 entries
Decision 2008 1 entries
Finance 6 entries
Flying 3 entries
General 83 entries
Higher Ed 28 entries
History 2 entries
History 2 entries
Israel 15 entries
Jewish 15 entries
Judicial Nomination 3 entries
Media Bias 5 entries
Movies 6 entries
Road Trip 5 entries
Social Investing 1 entries
Vote Fraud 7 entries
War on Terror 64 entries
Rocky Mtn. Alliance
Exultate Justi
American Kestrel
The Mangled Cat
Clay Calhoun
Mt. Virtus
My Damascus Road
Best Destiny
Thinking Right
The Daily Blogster

Friends of the Alliance
Bill Hobbs
Mile High Delphi
Flight Pundit
One Destination
Conservative Eyes
The Virginian Reporter
A Time for Choosing

other blogs
Oh, That Liberal Media
Girl In Right
One Big Swede
American Thinker
Meryl Yourish
NRO Corner
Little Green Footballs
No Left Turns
A Constrained Vision

business blogs
Carnival of the Capitalists
Cold Springs Shops
Commodity Trader
Coyote Blog
Different River
Fast Company Blog
Financial Rounds
Freakonomics Blog
Management Craft
Trader Mike
Carnival of the Capitalists Submission

business data
Inst. Supply Mgmt.
St. Louis Fed Economic Data
Nat'l Bureau of Economic Research
Economic Calendar
Stock Charts
colorado blogs
Boker Tov, Boulder
Colorado Pols
Jeff Sherman

<-?Colorado BlogRing#->

sites, not blogs
Thinking Rock Press
 help israel
Israel Travel Ministry
Friends of the IDF
Volunteers for Israel
Magen David Adom
 1939 World's Fair
1939: The Lost World of the Fair
The New York World's Fair: 1939-1940
The Last Great Fair by Jeffrey Hart
Iconography of Hope (U.Va.)
Images From the '39 Fair
 google ads
Powered by
Movable Type 2.64

June 08, 2005

Laboratories of Finance

The Wall Street Journal reported this morning on the proposed impending regulation of hedge funds ("Hedge Funds Brace for Regulation"):

Last year, amid the growing surge of interest from investors in hedge funds, William Donaldson, the outgoing chairman of the Securities and Exchange Commission, championed a staff recommendation that most hedge-fund managers register with the SEC as investment advisers. More pension plans, endowments and charities have shifted into hedge funds, which more directly impacts smaller investors. Sparking additional concern, more investors today meet the wealth requirements to invest in hedge funds -- set to be raised to $1.5 million of net worth, from $1 million. An estimated 8,000 hedge funds worldwide manage about $1 trillion in assets.

Even more important, the growth of hedge funds and the fact that they often use borrowed money to expand their investments means that the funds play a bigger part in daily movements of the market. Mr. Donaldson last year said the agency "needs to have a means for examining hedge-fund advisors and monitoring their activity."

The rule change, which doesn't have the support of certain officials, including Federal Reserve Chairman Alan Greenspan, is scheduled to take effect in February 2006 and would subject hedge-fund firms to regular audits and inspections. Funds also will have to provide the backgrounds of their executives, details of their trading strategies and how they value their portfolios, among other things. About 35% or so of hedge-fund managers currently are registered with the SEC.

Hedge funds were exempted from the 1940 regulation because of two assumptions: 1) people with net worth of $1 million didn't need to be protected - a somewhat patronizing assumption perhaps, for the rest of us, and 2) no individual fund could move the market.

Now, just because pension funds are foolish enough to invest in these things doesn't mean that they should be regulated. After all, Schwab doesn't consider roulette to be suitable investment for my IRA money, but Vegas still stays lit at night. Thanks to my water, of course. Ahem. But I digress.

The better reason for some hedge fund regulation is that the assumptions aren't operative any more. While $1 million isn't chicken feed, many many middle-class families can aspire to that goal within their lifetimes. And if Meriwether and his Meri Band of Academics at LTCM taught us anything about letting them outside the classroom, it was that one well-placed, poorly-timed, over-leveraged, under-supervised group of kids can spoil it for everyone.

Here's the problem, though:

Hundreds, if not thousands, of firms manage less than $100 million, and they might not be able to bear these burdens, some say. A $50 million firm, for example, likely charges its investors about 1% of assets a year as a management fee to cover the running of the fund. With the cost of registering so high, at least in the first year, some might think twice about starting their own funds.

A good compliance officer can pretty much eat up the entire fee of a small fund. While the Wild West mentality of most hedge fund managers will lead them to rebel at first, the larger funds will soon find, like their bretheren in other industries, that regulation is a swell barrier to entry.

Why do we need smaller funds? As the laboratories of finance. They're more nimble, can liquidate positions more easily without moving the market, and often represent the newer, more innovative uses of modern finance theory. If someone has a creative way of combining derivatives, they ought to be free to pursue that without having to tell the whole world what they're doing.

So instead of simply regulating the entire industry, which can only stifle innovation, the SEC should consider either one threshold, or a series of them as the fund increases in value, leverage, and impersonality.

Posted by joshuasharf at June 8, 2005 10:42 PM | TrackBack

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Balanced Scorecard for Public-Sector Organizations

The Balanced Scorecard for Government & Non-Profits

The Balanced Scorecard: Measures that Drive Performance

The Balanced Scorecard: Translating Strategy into Action

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

US Policy in Post-Saddam Iraq

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud