After completing a disastrous year in financial markets, capped by the $50 billion Bernie Madoff scandal, many experts believe a wave of regulation may be on the way.
Jeff Blumberg, partner at Drinker Biddle and a member of its investment management practice group, broke down potential changes at a recent panel in Chicago.
Blumberg provided five possible scenarios for regulatory changes. One would be the creation of a super regulator, which would encompass all of the current financial regulators based on the Treasury department’s white paper published a year ago; the second possibility would be to require third-party oversight of hedge funds; the third possibility would be to increase the accredited investor standard; the fourth would be revisiting the hedge fund rule, which was successfully challenged in court, and the fifth is the recently introduced Hedge Fund Transparency Act.
Of these, Blumberg says the best choice would be to require third parties to look at hedge fund managers. He points out that hedge funds have an incentive to overvalue their performance and requiring independent custodians and independent administrators would take away that incentive. “If Madoff had to have his assets sitting [at a third party], it couldn’t have happened. There is no way that he could have pulled off what he pulled off,” Blumberg says.
While he would support an increase in the accredited investor standard, he adds that it would not fix the current problems. As for the hedge funds rule, Blumberg reminded everyone that while Madoff was a registered investment advisor and registered broker dealer, he did not have a hedge fund.
He noted that the Hedge Fund Transparency Act would require funds to list all of their investors.
He says this will cause investors to either pull away from hedge funds or disguise their identities behind financial structures, making the whole industry less transparent.
Despite completing a strong quarter in its best year since 1990, the managed futures industry saw significant redemptions in the fourth quarter of 2008.
Assets under management dropped to $206 billion from $227 in the third quarter despite a 6.73% return in the Barclay CTA Index in the fourth quarter, according to Barclay Hedge President Sol Waksman.
Waksman attributes the drop to fear and the need for liquidity as fund of fund managers must pull cash from the most liquid investments.