Tuesday, December 19, 2006

Hedge Fund Regulation: Fools Gold

In the latest edition of Foreign Policy Sebastian Mallaby makes the case against hedge fund regulation . Mallaby makes the case that hedge funds create stability in the market. His argument injects reality into he demagogic political climate. Simply put hedge funds apply the breaks to major market fluctuations. As speculative risk takers, hedge fund managers are willing and able to pump funds into the market during trough and pull back during crests. This adds stability, not volatility. The volatility is simply transferred to high dollar investors that are willing to accept greater risk.

Regulators normally bemoan the lack of information available to the public, but this is a silly argument. If investors were so concerned (and this is the supposed target benefactor) then they wouldn’t be tripping over each other to get into a fund. As Mallaby outlines, managers are still subjected to a majority of the rules that keep them clean such as insider trading laws.

Hedge fund investors know what they are getting into, and the market is more stable because of their willingness to take risk. There is no reason whatsoever to take away a citizens freedom to choose how they invest their money.

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