Could regulation of the hedge fund industry have prevented the Madoff fiasco?  Perhaps.  But likely not the specific type of regulation envisioned in the SEC’s failed attempt to regulate hedge funds back in 2006.

Ironically, Madoff’s investment advisory business “voluntarily” registered with the SEC that year.  That was right around the Commission’s failed bid to have all hedge fund advisers register with it.  Many other hedge funds had already done so when Phil Goldstein’s suit against the SEC eventually vacated the ruling.  However, the surfeit of fund information that resulted from the registration drive provided academics with a unique chance to compare operational risk factors with more traditional investment risk factors.  Stephen Brown, William Goetzmann, Bing Liang, and Christopher Schwarz did just that in this paper called “Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration”.  (Brown was recently asked about the topic in this AP piece on Sunday)

The abandoned plan would have seen all hedge fund managers submit a form “ADV” to the SEC containing operational information (see Madoff’s Form ADV here).  According to the authors the form was designed as a “deterrence of fraud”:

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