Prevent the perfect storm

Author: | Published: 1 Nov 2007

Like nocturnal forest creatures, hedge fund managers have not relished the glare of attention brought on by the difficulties of the sub-prime mortgage market. They relish even less the suggestion that anyone should investigate, regulate or license private investment vehicles like hedge funds. The main argument against such measures has been that the sophisticated investors in hedge funds are perfectly able to look out for themselves.

This is a compelling argument. It breaks down only if aspects of typical hedge fund behaviour pose risks to investors; risks that even sophisticated parties could not be expected to divine from a careful reading of a private placement memorandum. These are not the risks of fraud, deliberate concealment or gross mismanagement on the part of hedge fund insiders. Examples of that kind have been few and far between in the hedge fund industry. But there are features of a typical hedge fund structure...