Hedge funds, the notoriously freewheeling corner of the financial sector, could be in for sweeping changes in the wake of the Wall Street crisis.
After several failed attempts to regulate the estimated $2 trillion industry, government officials have renewed efforts to rein in the funds, which are not regulated like mutual funds or publicly traded companies.
“I think it’s inevitable that regulation will increase,” said Zack Cohen, who in 2007 founded Palisair Capital Partners, a hedge fund in Century City.
Indeed, a survey last month by Rothstein Kass, a New Jersey-based financial services firm, found that 98 percent of hedge fund managers expect regulation to increase in the next few years.
Several local managers said stepped-up regulation would almost certainly raise costs for funds, which could become a major hurdle for smaller operators.
Currently, hedge funds are not completely unregulated. For instance, certain funds must disclose very large stock holdings to the Securities and Exchange Commission. And in recent months, the SEC has put additional disclosure requirements on short-selling activity.
But by and large, hedge funds are an unknown quantity, and that lack of oversight has provided fodder for critics who fear the funds could be the next bubble to burst.
“Hedge funds now pose very public peril when the bets go bad,” said Rep. Tom Davis, R-Va., who spoke at a Nov. 13 hearing of the House Committee on Oversight and Government Reform to determine the impact hedge funds have on the financial sector. Five top hedge fund managers, including Philip Falcone and George Soros, were summoned. They said would be amenable to additional regulations, but cautioned against forcing the public release of large amounts of data.
Attorney Gary Distell, a partner in the financial services practice at Katten Muchin Rosenman LLP, said regulation could exacerbate the financial industry’s problems.
“When you’re trying to (institute) regulation in such a volatile time, it’s very hard to attribute what is making the market do X,” said Distell. “It’s very complicated. The knee-jerk reaction is always to put more regulation on there and there are 50 unintended consequences.”