Tim Geithner’s plan to make it compulsory for larger hedge funds to register with the Securities and Exchange Commission, and to disclose information to the SEC about their investors and counter-parties, will probably cause some griping in the industry.

Hedge funds can fairly argue that they have hardly been at the epicentre of the financial crisis and have been able to suffer heavy investor withdrawals, and even collapse, without noticeably hurting the financial system as a whole.

Although the troubles of a couple of Bear Stearns funds, as well as two run by Goldman Sachs, were an early sign of the crisis, they were not the cause of Bear’s downfall.

I used to sympathise with the arguments of US hedge funds that they should be allowed to operate fairly freely, although some have to register with the Commodity Futures Trading Commission and others have voluntarily registered with the SEC.

But I think I have changed my mind, on the basis on what you might call the purple panda principle, after a quotation in an FT story today:

“It doesn’t really matter if it’s called a bank, a hedge fund or a purple panda,” says Randy Quarles, a managing director at Carlyle Group, the private equity firm, and former Treasury undersecretary.

“I think it is important for regulators to have the ability to step in in advance of a run actually happening at a systemically important institution.”

That seems to me to be the pertinent point. The vast majority of funds are small enough not to pose a systemic risk, but you never know what a non-bank financial institution will get up to these days, as AIG’s use of its balance sheet to trade credit default swaps showed.

On the face of it, although I await the briefings against the idea to see whether first appearances are accurate, the Geithner plan proposes fairly light-touch regulation for hedge funds compared with that for big banks and investment banks.

Incidentally, the Geithner proposals appear to put the US in line with practice in other financial centres, including London.

March 26, 2009 4:16pm in Business, Finance | Comment