Is No Hedge Fund Too Big to Fail?

Date: Tuesday, February 1, 2011
Author: Azam Ahmed, Dealbooknytimes.com

One of the main things on the minds of hedge fund managers and others in the industry (aside from Egypt and insider trading) is the prospect of regulation.

There is registration with the Securities and Exchange Commission, which for any fund with assets of more than $150 million will require turning over information like specifics about what the firm does and who works there.

But then there is the systemic risk reporting, which is still something of a question mark. Any hedge fund deemed systemically risky could be forced to report a level of detail previously unknown in the industry. And last week, the S.E.C. and the Commodity Futures Trading Commission issued a new form that would require hedge funds to report their holdings quarterly to determine which funds are too big to fail.

To that end, the president of the Managed Funds Association, Richard H. Baker, does not think any hedge funds meet that criteria. That’s not to say they won’t one day, but for now he does not see any that do.

“I don’t believe there is a firm that would be systemically relevant today,” he said.

Some disagree, often citing the 1998 blowup of Long-Term Capital Management as evidence that the government may have to step in. (In that crisis, the Federal Reserve organized a Wall Street bailout of the hedge fund.)

But Mr. Baker says much has changed since those days. And that’s for two reasons. Contemporary hedge funds deploy far less leverage, he said, so bringing up Long-Term’s fall as a reason for more oversight is a little like bringing up the Hindenburg when discussing air travel, he said.

Another major difference is the fact that the majority of investors are now pensions and endowments, Mr. Baker said.

As a result there’s more due diligence and transparency requirements from these investors.

“Hedge funds are the last corner of financial free market enterprise,” he said.

Basically, you raise money on your own, make money on your own and lose money on your own, he said.