Can US retail investors “fend for themselves”?
Jul 22nd, 2008 | Filed under: Hedge Fund Regulation
With all the finger-pointing going on right now on Wall Street, the topic of hedge fund regulation is never far from the front pages. So today and tomorrow, we will review a couple of comprehensive, but very readable essays written not by financial academics or hedge fund managers, but by legal scholars. These papers paint a contrasting picture of the most appropriate regulatory framework for hedge funds.
The first, which we discuss below, was written by Houman Shadab of George Mason University. Shadab’s article “Fending for themselves: Creating a U.S. hedge fund market for retail investors” was published in the Spring 2008 NYU Journal of Legislation and Public Policy and is available here. In it, he argues that “financially sophisticated” US retail investors are actually hurt by regulations preventing them from investing in hedge funds, not helped by them.
The second paper, covered tomorrow, defends government regulation of hedge funds, stating that ”self-regulation will not necessarily result in any efficiency gains as government regulators will remain the ultimate drivers of any regulation.”
Shadab’s paper starts by saying that the US actually has a relatively restrictive hedge fund regulation:
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Shadab missed the most important reason why Hedge Funds should me made available to a wider number of investors: They are building strategic information advantages that give them an advantage in the market over the retail investor. When you look at the capabilities that are being built in fundamental and quantitative analysis and compare that with the dumbing down of information available to a retail investor, who would you bet on? Gerson Lehrman vs. MarketWatch? Bloomberg v. SeekingAlpha? Please, no contest. To paraphrase a popular 80’s entertainer: Please hedgies, don’t hurt ‘em!
Government regulations may have, in fact, created a situation where hedge funds will continue to take economics from retail investors due to this information advantage and perpetuate a transfer of wealth the government didn’t intend (or maybe it did).