SANTA BARBARA, Calif. -- The U.S. government's decision not to tighten regulations on hedge funds won't help the industry dodge stricter rules elsewhere, industry experts said.
"I think the reality is that the hedge fund industry is going to have more regulation and the people who service it are going to have more oversight," said Cynthia Steer, managing director at investment consultancy RogersCasey.
The European Union already is picking up where the United States left off with hedge fund regulation, Steer said during a panel discussion on hedge funds at an asset allocation conference in this Californian resort town.
"As a reality, the EU is going to have more oversight of the hedge fund industry," she said. "I think European central bankers think that hedge funds are a good and essential part of the financial industry because they provide primary and secondary liquidity. But the fact that they are unregulated means they should more have oversight, to put (them) on the same playing ground with other funds."
The U.S. President's Working Group on Financial Markets last week said the regulatory regime was "working well" for the $1.5 trillion U.S. hedge fund industry. But it said investments in such funds should be limited to "more sophisticated investors," suggesting net worth standards for accredited investors ought to be raised.
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The panel, led by Treasury Secretary Henry Paulson, former chairman and chief executive of Goldman Sachs , which has major hedge fund operations, also called for broader disclosure on the part of hedge fund managers, many of whom have historically resisted such measures.
It called on managers of pension funds, who manage money on behalf of smaller investors, to exercise greater due diligence in overseeing investments.
Connecticut Attorney General Richard Blumenthal, whose state is second only to New York for the number of U.S. hedge funds based there, criticized the panel's recommendations as lacking "substance and specifics, making them unenforceable."
Hedge funds, once seen as money machines, lost some of their glamor last year after the speculator collapse of a few players such as Amaranth, which lost $6 billion on a natural gas bet, and Ospraie, which closed down a $250 million fund after a bad call on copper.
"There are some things that some of the larger hedge funds have done to become more institutionalized so they look, smell and feel more like a traditional manager in terms of how they set up the shop," Michael Chris, senior vice president at Assey Consulting Group, told the conference at Santa Barbara.
"But let's face it, there's $1.5 trillion of assets in this alternative bucket. You could walk out of this room, set up a limited partnership, print out a private placement memorandum and charge 2 percent for fees and 20 percent for profit," Chris said.
"So there are always going to be situations where there are a number of partnerships or alternatives that are unregulated, don't have the right oversight, don't have the right operational infrastructure. So that just makes it more and more important for trustees to do the right kind of job from the diligence point."
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