Paulson Seeks to Charter Hedge Funds

Date: Friday, November 21, 2008
Author: James Armstrong, Hedge Fund Correspondent, Marketsmediaonline.com

Treasury Secretary Hank Paulson is calling for hedge funds to be chartered in order to permit oversight by regulators.

Speaking at the Ronald Reagan Presidential Library, Paulson said government inaction and outdated regulatory systems were part of the cause of the current financial crisis. Regulatory reform, he stressed, should be based on principles of transparency and accountability.

Don Steinbrugge, chairman of hedge fund consulting firm Agecroft Partners, told Markets Media Friday such a plan might be useful. Many hedge funds use proprietary strategies, he said, and in order for the funds to operate effectively, it is important that the securities they invest in are not revealed to the general public.

"I think there's a high probability that hedge funds will have some type of regulation going forward," Steinbrugge said. "It's very important, whatever that regulation is, that it does not overly burden hedge funds."

Steinbrugge added hedge funds are important to the capital markets in providing both capital and liquidity.

Paulson counseled against a hasty regulatory response to the crisis, but said the government should seek more effective regulations within an entirely new framework. He proposed a new model for a market stability regulator with the authority to review any systemically important financial company.

"To ensure the market stability regulator can fulfill its role, large, systemically important institutions, including hedge funds, should be required to have a charter that would permit some type of oversight," Paulson said Thursday .

Support for some sort of regulation of hedge funds has been growing in Washington. Last week, former Securities and Exchange Commission Chairman David Ruder told congress the SEC should have the authority to register hedge fund advisers and require them to disclose risk. An appeals court struck down a previous SEC registration rule on the grounds it did not have a legislative mandate.

Even many hedge fund managers themselves have come to favor greater regulation. Speaking at the same congressional hearing as Ruder, James Simons, chairman of the legendary hedge fund firm Renaissance Technologies, said the SEC and the Federal Reserve took too much of a hands-off position on credit default swaps and the leverage posture of investment banks.

Simons has suggested requiring hedge funds to report their positions to the Federal Reserve or a similar authority so the government can have access to aggregate position information. He has stressed, however, such information should never be released to the general public.