Hedge Fund Reader : Will Regulations Rein Hedge Funds?

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July 25, 2006

Will Regulations Rein Hedge Funds?

An article on honesty in a magazine caught my eye the other day; it propounded the theory that people are more straightforward when they feel they are being watched.

An experiment was carried out in an office cafeteria to test the extent of its employees’ honesty. Workers in the office could help themselves to beverages from the machine and drop the money in a box on the counter. It was found that the amount in the box increased during certain periods and decreased during others, even though the amount of coffee dispensed during each period remained almost the same.

A deeper investigation into the matter pinned responsibility for the discrepancy on a picture frame tacked to the cafeteria wall near the coffee machine. The frame contained a different picture every week, one of which was a human eye. I know it sounds ridiculous, but employees actually paid for their coffee when they felt they were being “watched by the eye”.

If perceived supervision itself is such a forceful deterrent to malpractice, imagine what actual regulation will do. So is it too much to ask that hedge funds, the $1.3 trillion industry, be regulated by the US Securities and Exchange Commission (SEC)?

Federal Reserve Chairman Ben Bernanke is of the opinion that court ruling or not, hedge funds need be monitored so they don’t take excessive risks or leverage, and in the process, threaten the US financial system. He advocates two measures; the first is to supervise large banks and investment banks that transact with hedge funds, and the second is to ensure that investors in hedge funds are extremely rich and sophisticated in their dealings.

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July 25, 2006 in Regulation | Permalink