Regulating Hedge Funds

Hedge funds are very similar to mutual funds except for fewer regulations and therefore can invest in a broad range of investments including shares, debt, commodities and so forth. Hedge funds have the freedom to seek to offset potential losses in the principal markets invested in by hedging their investments using a variety of methods, hence the name hedge funds.

Academics, industry professionals, and regulatory authorities overwhelmingly agree that due to much less regulations, hedge funds benefit the economy by mitigating price downturns, bearing risks that others will not, making securities more liquid, and ferreting out inefficiencies. Compared to mutual funds, hedge funds are less restricted and transparent and they prosper for it.

This reticent nature of hedge funds makes them look suspicious and leads to many apprehensions in the minds of the investors, such as; high price tag and the extravagant amount of money required for their initial purchase makes people think that the investors are being "hood winked" into putting money into these funds. Only ensuring high level of transparency in the working of the hedge fund industry so that an investor knows exactly where his money is going can clear these apprehensions.

The regulation of hedge funds, rather like the funds themselves, is a complex matter. Because of their different properties and practices, hedge funds as a group are best understood from a legal, not economic, perspective, as hedge funds typically are exempt from the registration and disclosure requirements of the financial industry. This results in no official hedge funds statistics with little outside knowledge about their financial movements. This is not helped by hedge funds being based in offshore jurisdictions, making them look even more suspicious.

One solution to this scepticism is to introduce better regulation. This would produce more accountable hedge fund managers in future and the investors would be able to simply research the background of a hedge fund manager before entrusting their money into his or her hands. The result is beneficial for both investor and hedge fund as regulation would produce a safer hedge fund market that would attract a larger number of investors.

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