The IHT reports that Fed chairman Ben Bernanke supports "light regulation" of hedge funds because they deal with sophisticated investors and don't demand government bailouts. This is particularly timely because foreign governments, especially Germany have been to increase pressure of hedge funds for greater transparency.
The United States however, has a history of not regulating hedge funds. Even the collapse of Long-Term Capital Management in 1998 did not cause a rush to regulation. Just last September, Amaranth Advisors lost $6.6 billion in the natural gas market.
This caught my eye because Trader Daily just published its list of the highest earning traders. The top guys are all hedge fund folks, so it is to be expected that they would be rolling in the dough. But the top 5 traders made over $1 billion each. Yes, that's right, billion with a capital 'B'. And the number one spot was held by a Houston hedge fund manager who made about $2 billion betting exactly opposite Amaranth.
It looks like hedge funds are the place to be for managers looking to make a quick buck, but it is unclear if they are going to destabilize the economy. At the end of the day, if traders think oil is going to go to $500 a barrel and buy up all the available contracts, they will only hurt themselves. Oil isn't going to end up that high, and six months later the hedge fund guys will be out on the street.
Regulators need to watch companies that think they can juice their returns by investing in the exotic derivatives and other financial incentives offered by hedge funds. As long as hedge funds are just investing "Mad Money", speculation isn't a bad thing. Just make sure that your pension doesn't do something stupid and invest in the guys who used to work for Amaranth.
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