Best way to regulate hedge funds is to regulate prime brokers better, says new paper
Nov 11th, 2008 | Filed under: Hedge Fund Regulation, Today's Post
While the average hedge fund is small and uses a very small amount of leverage, the average dollar invested in hedge funds is managed by a large manager who regularly uses leverage. This state of affairs is courtesy of the significant amount of concentration in the hedge fund industry. Most of the world’s hedge fund assets are managed by a small group of mega-managers who can shop their business around to various prime brokers in order to extract the best deal.
A new paper says that in an effort to win this business, prime brokers have been falling over themselves to offer the most leverage and the best terms. Ergo, it is the prime brokers, not the hedge funds themselves, that require stricter regulation. (Think: regulating mortgage brokers, not home-owners…)
By doing so, regulators can also get the prime brokers to do some of their their bidding when it comes to hedge fund oversight. In other words, they’d essentially be informally deputizing the prime brokers.
The paper was written by Michael King of the Bank for International Settlements and Philipp Maier of the Bank of Canada. (Note to PR departments of these organizations: Relax, the author say that “No responsibility should be attributed to the Bank for International Settlements or the Bank of Canada“.)
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