House Passes Hedge Fund Study Bill

by Leroy Baker, for LawAndTax-News.com, New York

29 September 2006

The US House of Representatives has approved a bill that would require the President's Working Group on Financial Markets to study the impact of the $1.2 trillion hedge fund industry on the financial markets.

If signed into law, the legislation, known as the Hedge Fund Study Act, would require the working group to formulate recommendations regarding hedge fund disclosure requirements.

The legislation could gain added impetus as more details emerge regarding the collapse of the Amaranth hedge fund, which took a disastrous punt on natural gas prices and is said to have lost about $6 billion in the process - surpassing the losses of Long Term Capital Management in 1998.

Republican Rep. Mike Castle of Delaware, who introduced the bill, stated that: "Hedge funds are now a $1.2 trillion industry and can be high-risk, high stake investments."

"While usually targeted to wealthy investors, hedge funds are seeing an increase in ties to pension plans. Regulators need to explore hedge funds and the potential risks they pose to financial markets and investors. Transparency in our financial system is important for market discipline and investor confidence."

In addition to studying the rapid growth of the hedge fund industry and the changing nature of hedge funds themselves, Castle's legislation would examine the growth of pensions investing in hedge funds, and whether investors are adequately protected against the risks associated with their investments.

It would also require agencies to decide which type of information hedge funds should disclose to regulators and the public and the type of oversight members of the President's Working Group should have over the hedge fund industry.

Although the Working Group was created originally to address issues related to the 1987 stock market crash, it now serves as a forum through which the participating agencies exchange information on, and coordinate regulatory policy regarding, US financial markets more generally.

There is currently no companion bill in the Senate, although the Senate could pass the House bill.

The traditionally secretive hedge fund industry has been resistant to moves that would require funds to disclose information about their clients and trading strategies, and a new rule requiring US hedge funds to register as investment advisors with the Securities and Exchange Commission was successfully challenged in court earlier this year.

However, the phenomenal growth of the industry, coupled with the huge leveraged stakes that some of the larger multi-billion dollar hedge funds have in the financial markets has led to increasing calls for more oversight of the industry. These calls are likely to grow in volume when the true cost of Amaranth's collapse is known.

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