The CEO Hedge Fund Scourge

Last Updated Apr 16, 2008 6:17 PM EDT

For under-performing CEOs, hedge funds can be a frightful scourge that can force board changes resulting in their ouster. Yet, the perennial debate about hedge fund regulation is taking on a new urgency since some are being blamed for contributing mightily to the sub prime mess and credit squeeze.

Judging from the results of two advisory committees meeting in Washington yesterday, don't expect any big bouts of new regulation. The two committees, one made up of asset managers and the other of investors, spouted the usual "mea culpas" and called for greater market discipline. But following the line of Treasury Secretary Henry Paulson, who helped pick the committees,the results are likely to be a sop to Wall Street.Translation: no regulation.

According to news accounts, hedge funds have lost about $245 billion in assets in the current financial crisis, especially those that bundled and sold mortgage-backed securities. That explains the very public soul-searching, but that's just public relations.

Fact is, hedge funds enjoy their unchecked power and don't want to give it up. About 8,000 of them handle about $2 trillion in assets.The conceit of their managers is that they are brilliant rocket-scientists who must operate unfettered and in the dark to bring on those exceptional "alpha" returns. I was amazed once when a hedge fund manager told me that regulation is impossible because the 30-something-year-old lawyers the Securities & Exchange Commission hires to do the grunt regulatory work are simply not smart enough to understand what hedge funds do, let alone regulate them.

Such arrogance is no longer merited. Few Hedge funds can deliver those super, double-digit returns. One argument for the hands-off regulatory approach is that investors are big boys and girls who know what they are doing. Indeed, the SEC has restricted hedge funds to individuals who have no less than $2.5 million in personal assets.The theory is that people with those kinds of assets are responsible and smart and know what they are getting into.

Maybe. But should entities that carry such much regime-changing clout in C-Suites be able to operate as they please in the dark? Some believe the recent financial crisis are the worst since the Great Depression. In a world such as this, can the U.S. afford to let hedge fund managers go their elitist ways. What do you think?