We were in Chicago earlier today (Tuesday) at the Managed Funds Association’s Forum 2009.  “MFA” used to stand for “Managed Futures Association”.  So as you’d expect from a Chicago-based meeting of this group, there were plenty of CTAs and global macro managers discussing trend following and pork bellies.

But not far beneath the surface of nearly every session was the 800 pound gorilla in the room: the ongoing saga of hedge fund regulation around the world (see our category by that name at right, or our research dossier containing over 60 critical documents on the topic).

The days when hedge funds and regulators squared off in a perennial grudge match seem to be long gone.  Phil Goldstein, the colourful and tenacious advocate of hedge funds, who challenged and beat back the SEC’s 2006 attempt at regulation, has been replaced by the more sanguine approach taken by the MFA’s Richard Baker and AIMA’s Andrew Baker (no relation - but bizarre coincidence nonetheless we note).

Both groups, along with a smattering of others in Washington DC, have stepped up their educational efforts on Capitol Hill this year.  The Wall Street Journal reported on Monday that, More…

California and Connecticut are separated only by Colorado on an alphabetical list of US states.  But when it comes to hedge fund regulation they may be attached at the hip.

As we have over the past month in Europe, Hedge fund regulations are easier to talk about than to actually create.  That may also be the lesson learned by Connecticut state regulators last week.  After much ballyhoo earlier this year, the legislature decided to quietly abandon its efforts to regulate hedge funds residing in the Constitutional State.  This was yet another in a long line of abandon regulation bills that litter the pages of hedge fund history books.  In fact, long-time AllAboutAlpha.com readers may remember this AAA post about the same sort of thing in California called “Requiem for another attempt at hedge fund regulation“.

Blame Game

In October 2007, HedgeWorld reported that “California Wants to Register Hedge Fund Managers”.  Wrote HedgeWorld’s Chidem Kurdas:

“If the proposal to amend California corporate securities law goes through, most managers that have an office in the state and are not voluntarily registered with the U.S. Securities and Exchange Commission will have to register with the department.”

Fast forward to Connecticut last week and not much has changed.  Like California’s legislators, those in Connecticut point a finger at the SEC for having huge holes in its fishing net.  For example, Forbes reported recently that: More…

Remember the part in Monty Python’s Life of Brian when the representatives of the People’s Front for Judea get into an argument with the Judean People’s Front and then can’t remember the name of their own organization?   (If not, here’s the video on YouTube.)

That’s probably how the major hedge fund trade associations are feeling right now.  Over the past week, there have been two high profile calls for new hedge fund trade associations to address the needs of specific constituencies.  This has added to several other calls for new associations meant to represent the interests of various players in the hedge fund sector.

First there was Cliff Asness in the now infamous “Unafraid in Greenwich” letter.  Playing off of Barack Obama’s start in politics, Asness concludes:

“Hedge funds really need a community organizer.”

Funds that investment in PIPEs (private investments in public enterprises) went a step further, actually launching their own association: the Direct Funding Preservation Alliance.  Reports the WSJ: More…

Although many hedge fund managers bristle at the notion of regulation, there is a growing view that compulsory registration would bring with it a major silver lining: it would remove a key reason why hedge funds have become scapegoats for just about everything.

Financial Planning reports on the “reversal” of the Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) last week when they testified in from of the US Congress.

In AIMA’s May 7 testimony, Executive Chairman Todd Groome told Congress that he…

“….supports the registration of investment managers, including hedge fund managers, with the appropriate national authorities in the country in which they are principally based…Such a process of registration leads to a supervisory relationship between managers and the appropriate national supervisor, creates a relationship and dialogue which supports greater understanding of hedge fund activities and allows for increased oversight of markets more generally.”

And in his testimony, the MFA’s Richard Baker said: More…

Several recent studies have indicated that the ban on short selling some stocks implemented last fall had a negligible, if not a negative, impact on markets.  Not only did the bans fail to halt the downward slide in stock markets, but they also led to an increase in bid-ask spreads - a sure sign that market liquidity (and thus efficiency) declined.

But one of the ongoing challenges these studies have faced was to determine how much of the post-ban slide in markets was the result of the continuing (and even accelerating) market mayhem and how much might have actually been caused by the bans themselves.  In fact, a new analysis by Abraham Lioui of French research centre Edhec-Risk says that these studies “are unable to disentangle the impact of the ongoing crisis in the financial markets from the impact of the ban on short selling.”

Lioui proposes another approach to “disentangling” the effects of the financial crisis and the effects of the short-bans themselves.  They come to the “odd” conclusion (their description) that equity indices seem to have responded more “strongly and systematically” to the short bans than did the so-called “off-limits” stocks themselves (those where shorting was actually banned).

We summarize Lioui’s conclusion below: More…

It was over two years ago that policy makers in some countries heaped scorn on the “locusts” behind hostile takeovers.  Soon after, in a June 2007 report called  “Where the House Always Wins: Private Equity, Hedge Funds and The New Casino Capitalism“, the International Trade Union Congress joined in the melee by launching a blistering attack on private equity funds:

“When companies are taken over by these private funds, they escape stock market regulations, increase dividends to their new owners, and accumulate incredibly high levels of debt. Since the private equity firms aim at making quick returns by reselling their acquisitions within a couple of years, they introduce their portfolio of companies to rapid financial and organisational restructuring.”

In large measure due to this popular backlash against PE funds, the World Economic Forum published a report in January 2008 that attempted to dispel some of the myths surrounding private equity.

“The discussion of many aspects of private equity’s impact on the economy has been characterized by confusion along many dimensions. As the employment study highlights, the evidence supports neither the apocalyptic claims of extensive job destruction nor arguments that private equity funds create huge amounts of domestic employment.”

And so the debate raged on over the social costs of “casino capitalism” fueled by cheap money.  Private equity funds became the poster-child for locusts and cockroaches everywhere.

However, as faceless, often nameless players in amorphous global capital machinery, hedge funds largely avoided the crosshairs of regulators back then.  Often the word “activist” was added to the term “hedge fund” in order to link them to their private equity cousins.  But the regulatory focus of 2007 and the first half of 2008 remained clearly on private equity managers, not hedge fund managers. More…

There seems to be two broad categories of government policy reports on hedge funds over the last few years: those that view hedge funds as self-serving geniuses (example: International Trade Union Congress) and those that view hedge funds as valuable contributors to the global good (example: President’s Working Group).

Naturally, the truth is somewhere in between.  A new report from the International Organization of Securities Commissions (IOSCO) combines both views and paints hedge funds as a sort of self-serving geniuses who happen to contribute to the global good.  The paper was written in response to a call for input from the upcoming London G-20 summit.

Pleasing two masters

As an organization whose members simultaneously count on support from the general public and from hedge funds (whose trading helps fuel their local financial markets), IOSCO has ensured the report has something in it for everyone.  For example, the following excerpts will surely warm the cockles of hedge fund managers’ hearts around the world: More…