Why aren't hedge funds regulated by the SEC?
They have so much capital behind them you'd figure the government would want to watch them like hawks...but that's not the case and I'd like to know why (or how) that came about?
Answers
4107 points
MNSL answered 2 years ago …
Definitely this is very good question.
I think government should control their activities to prevent collapse of financial systems
Some hedge funds should also take responsible for the current mess. In addition, there should be some systems to monitor what these top investment banks, brokers and insurance giants do.
These banks, insurance giants and hedge funds can create markets for and commodity, stock and other instruments and products going against demand and supply theory. We know what happened to the investors who bought these instruments worldwide
These top banks, instead of concentrating on the core businesses they create bubble such as commodity bubble. As a result of this inflation went up through out the world and many industries collapsed and unemployment went up due to closure of plants, factories and companies. Now there is demand destruction for the oil and other commodities s and some industries will take years to recover except some sectors.
They can bring prices up and down for any commodity or stock irrespective of demand and supply theory.
If you do some research, you will know how these funds works. Collapse of hedge funds, top investment banks and brokers are example for the how systems work and how can end up if they fail.
Finally, it put taxpayers, government into difficult position and at the end, everybody is losing.
2189 points
ChaosNantuko answered 2 years ago …
first off, mutual funds control FAR more money then hedge funds do. The impact of mutual funds is far greater then the impact of hedge funds.
Second, the government can not police everything. A hedge fund is essentially just the rich giving their money to someone else, and that someone else investing it for them. While its like a mutual fund, the big difference is that because the investors are quite wealthy, its assumed they understand risk and don't need to be protected from it. Mutual funds, on the other hand, are invested in by individuals who generally can't afford a lot of risk, and so governments protect them by heavily regulating mutual funds.
Ironically, a solid case can be made that hedge funds prevent bubbles from forming. Mutual funds are generally long only. All the money that goes into a mutual fund drives up stock prices, helping bubbles form. Hedge funds are both long and short - some funds are even short only hedge funds. This means that a hedge fund managing a billion dollars won't drive the market up as much as a mutual fund managing a billion dollars. In fact, a hedge fund manager identifying a bubble may actually short the instruments in question ( http://www.quantnet.org/forum/showthread.php?t=2002 ), something a mutual fund couldn't do.
The idea that hedge funds can single-handedly create bubbles such as the commodity bubble is ridiculous. Look no further then the housing bubble that formed at the same time. That housing bubble was completely based on consumer buying, no hedge funds involved. If hedge funds moved the market to the extent you claim, the second they stopped buying, the price would fall so fast they would lose money trying to exit.
If hedge funds should be regulated, should we also regulate berkshire hathaways investments? Warren buffet buying something certainly drives up the price, not to mention everyone who follows him into the position because he is good at the investment game.
Because hedge funds are poorly understood, they're frequent the target of allegations, many of which are partially unfounded, others of which are completely unfounded, and most of which aren't solid regardless. At any rate, i think government regulation isn't the best policy in this case.
