A bold new theory on why attempts to regulate hedge funds tend to fail

Sep 24th, 2009 | Filed under: Academic Research, Hedge Fund Regulation, Today's Post | By:
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Back to the drawing boardOver the years, we’ve often marvelled at the sheer volume of failed hedge fund regulations at the state, national or international level.  It’s enough to make you ask why?

A recent paper written recently by Paulo Robotti of the Institut Barcelona D’estudis Internacionals (IBEI) proposes a reason for this apparent string of failures.  Robotti draws on political theory that he says was first developed in the early 1970′s called “regulatory capture”.

Robotti divides the sordid history of hedge fund regulation into two distinct phases.  The first phase (1998-2003) was a response to LTCM and was marked by attempts to govern the potential systematic risk posed by hedge funds.  The President’s Working Group (PWG) and Financial Stability Forum (FSF) were the legacies of this era.

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  1. An interesting theory that will be put to the test. The US proposal seems to be following Robotti’s theory. But the EU proposal has created an adversarial environment between regulators, funds and individual EU countries. Given the differing view of government in the US and Europe this isn’t surprising. The question will be – what approach produces effective oversight.

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