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One Regulator To Rule Them All

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Whenever we mention that there are special interests backing the push for new hedge fund regulation, we always get questions from readers wanting to know just who exactly these "special interests" are. And that's probably putting it too gently. In fact, many of our correspondents seem to think we are ourselves the mouthpieces for hedge fund managers who prefer to operate under the cover of darkness to accomplish their nefarious alpha-seeking strategies. After all, aren't the only people pushing for regulation politicians, regulators and other servants of the public good?
Stifle your laugh for a moment at this characterization of bureaucrats and office-holders for a moment. It's wildly far-fetched but can make a useful counter-factual assumption for trying to think about a very useful question: who else is pushing for hedge fund regulation? And to get to the answer to this question we need to ask one of the oldest and most pointed questions there is: cui bono? Who benefits?
Who stands to benefit from increased regulation of the hedge fund industry? Again, let's put aside the politicians and the bureaucrats. Who in private business benefits? In the first place, by increasing the rent of occupying that swath of territory called "hedge fund land" additional regulation would benefit those hedge funds with the most ability to absorb increased overhead. And the increased regulatory cost would serve as a barrier to entry. So we start with two quick categories of potential beneficiaries: established hedge funds and larger hedge funds that already bear large legal costs.
But, of course, it's not just certain hedge funds that benefit. There's also those firm's that compete with independent hedge funds for the investment capital of the wealthy. Investment banks, for instance, particularly those with their own brokerage and private banking practices, are certainly in competition for the investment capital that now finds its way into hedge funds. (This is one reason so many of them are starting or acquiring hedge funds for themselves.)
But even this is too narrow a view. Investment banks compete not just for dollars but for human capital, and for years some of the best and brightest talent on Wall Street has been drawn to Greenwich. Anything that can increase the cost of hedge funds doing business, and therefore potentially cut into their profit margins and compensation offered, will help Wall Street's financial institutions compete with these smaller, less regulated entities.
So you want names? Not just broad categories? Well, let's start with Sandy Weill, the man who built Citigroup. In a long interview with Spiegel, Weill reveals that he thinks that hedge funds need to open up their books to regulators. What' more, Weill wants to see one regulatory agency charged with taking in the entire financial industry--securities, banking, hedge funds--on the grounds that only a unified agency could contemplate the entire global financial market.
Now there's lots wrong with Weill's argument and it would be fun taking it apart. But that's not the point of this item. The point was to show how asking a simple question can often get you some interesting answers.
"Hedge Funds Have to Open their Books to Regulators" [Spiegel]