With one hand U.S. Treasury Secretary Timothy Geithner beckons to hedge funds, asking them to step up to the plate and help bail out the banks (see “The TALF Tangle”). With the other he bears the cudgel of regulation, proposing that hedge funds be marched down to Washington and registered with the authorities.
The idea is vintage Geithner in its vagueness, and it scares hedge fund managers, who imagine that if the Treasury Department were a law firm, the shingle out front would read Jekyll, Hyde & Geithner. What seems like a mostly innocuous push for reform could, many worry, create a monster. “The devil’s in the details, and we don’t have any,” notes Monica Arora, a New York–based lawyer who specializes in investment-fund advice at White & Case.
Arora and others say the hedge fund industry is seized with a sense that change is inevitable but that managers are concerned about how much information they will have to cough up. “Part of the fear is that the rule is [going to be] so broad — will they have to divulge trading positions, their entire portfolio, their leverage?” Arora says. “That’ll make them scream.”
The government says all it wants is to be able to accurately gauge systemic risk, and some managers say that’s a reasonable demand. “A regulator should be able to see everything we own,” argues Marc Lasry, chairman and CEO of Avenue Capital Group, a roughly $16 billion, New York–based hedge fund firm. “Someone should be able to see all that information and figure out, ‘Hey, is there too much risk in the system? How do we turn it down?’ or, ‘We can increase it a little bit.’” Lasry concedes, however, that the industry doesn’t entirely trust the government to write a straightforward rule: “That is what everybody’s worried about.”
The best tack is to accept fate and help shape it, advises Neil Morris, head of the New York office of Kinetic Partners, a firm that advises hedge funds on regulatory compliance. “Help design it,” says Morris, “rather than perpetuating the myth of secrecy and backroom dealings.”
Leon Cooperman, founder of $2.8 billion, New York–based hedge fund firm Omega Advisors, says that what Geithner seeks is redundant. “The bulk of assets are already under registration,” says Cooperman, who argues that most hedge funds report voluntarily to regulators and that most are self-motivated to behave responsibly. “We have our reputation, and my reputation is more important to me than anything else.”
