One of the most striking proposals of the new Obama plan to fix financial system is the regulation of the so-called prívate pools of capital: hedge funds, prívate equity funds and venture capital funds.
According to this plan, which would require Congressional approval, these fund advisers would have to register with the SEC and provide to government confidential information on topics like level of leverage, investors and partners. Most probably, these tougher rules will limit fund´s ability to borrow money to invest in high risk bets.
Before this approach I wonder whether, for this kind of investments, it makes sense to regulate more or rather to enforce what it´s already regulated. Especially on topics related to information and transparency.
At least until now (and in theory), hedge funds were limited to investors who can afford big risks, looking for big rewards… that can become positive or negative. So, what is the explanation to the fact that in the last years traditional investors (like university endowments and pension plans) had become heavy hedge funds investors?
On the other hand, can we say that these funds caused the present crisis? Do we have enough evidence on this? The answer is clearly no. I do believe that the financial mess which led to the current economic crisis was provoked by investments banks acting as hedge funds, or selling to their customer hedge funds solutions as normal investments.
As Wharton´s Professor M.E. Blume notes: «If the hedge funds lose money, that´s okay. No problem. It´s when the banks lose money that we have a problem»
More than new regulation, I would say that emphasis should be put in to fulfill the present one. And avoid speculative actions with lack of transparency, like selling short without control. In that sense, the «uptick rule,» which limited short selling, is likely to be proposed early next month by the Securities and Exchange Commission. The rule, which was in effect in the USA from 1938 until 2007, restricted short selling in a declining market. Under the rule, the market needs to have an upward drift to it in order to short.