Indirect Regulation of Hedge Funds

2021 ◽  
pp. 473-488
Author(s):  
Wulf A. Kaal
Keyword(s):  
International Cooperation ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Industry ◽  
Direct Regulation

This chapter evaluates the prevalent regulatory approaches for hedge funds. Among these are direct regulation, indirect regulation, so-called prudential hedge fund regulation, and eventually co-coordinated international cooperation. The chapter shows that indirect regulation of the hedge fund industry attains most regulatory objectives while providing the industry with sufficient freedom to operate. The chapter concludes with an examination of the benefits of indirect regulation of the hedge fund industry.

Portraits of five hedge fund fraud cases

2008 ◽  
Vol 15 (2) ◽  
pp. 179-213 ◽  
Author(s):  
Majed R. Muhtaseb ◽  
Chun Chun “Sylvia” Yang
Keyword(s):  
Asset Management ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Investment Fund ◽  
Good Opportunity ◽  
Content Type ◽  
Fund Managers ◽  
Management Group ◽  
Fund Industry ◽  
Asset Managers

PurposeThe purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.Design/methodology/approachThe paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.FindingsThe five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.Originality/valueThis is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.

Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011 ◽  
Vol 46 (4) ◽  
pp. 1073-1106 ◽  
Author(s):  
Yong Chen
Keyword(s):  
Risk Reduction ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Market Risk ◽  
Risk Shifting ◽  
Large Sample ◽  
Event Risk ◽  
Market State ◽  
Fund Industry

AbstractThis paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

PONZI FINANCE AND THE HEDGE FUND INDUSTRY

2012 ◽  
Vol 15 (supp02) ◽  
pp. 1250037
Author(s):  
WILLI SEMMLER ◽  
RAPHAELE CHAPPE
Keyword(s):  
European Union ◽  
Dynamic Model ◽  
Asset Management ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Stochastic Dynamic ◽  
The European Union ◽  
Obama Administration ◽  
Regulatory Frameworks ◽  
Fund Industry

This paper presents a stochastic dynamic model that can be used to describe situations in asset management where hedge funds may inadvertently find themselves running a Ponzi financing scheme. Greater transparency is necessary to reduce such opportunities, such as audited financials, and disclosure of valuation methodologies. In that respect, new regulatory frameworks enacted by the Obama administration and the European Union are welcome developments.

Hedge Fund Regulation

2017 ◽  
Author(s):  
Wulf A. Kaal ◽  
Dale A. Oesterle
Keyword(s):  
United States ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Private Investment ◽  
The United States ◽  
Regulatory Framework ◽  
Securities Regulation ◽  
Investment Fund ◽  
Investment Funds ◽  
Fund Industry

The hedge fund industry in the United States has evolved from a niche market participant in the early 1950s to a major industry operating in international financial markets today. Hedge funds in the United States began as privately held and privately managed investment funds, unregistered and exempt from federal securities regulation. An increasing investor demand for hedge funds and substantial growth of the hedge fund industry resulted in a tectonic shift in the regulatory framework applicable to the industry via the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act. This chapter summarizes the evolution of the regulatory framework governing the hedge fund industry. It focuses on the registration and disclosure provisions added by the Dodd-Frank Act and several other regulatory innovations, including the Jumpstart Our Business Startups (JOBS) Act and proposals for tax reform of the private investment fund industry.

Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry

2016 ◽  
Vol 51 (6) ◽  
pp. 1991-2013 ◽  
Author(s):  
David M. Smith ◽  
Na Wang ◽  
Ying Wang ◽  
Edward J. Zychowicz
Keyword(s):  
Hedge Funds ◽  
Lower Risk ◽  
Market Timing ◽  
Hedge Fund ◽  
Technical Analysis ◽  
Fund Managers ◽  
Short Sale ◽  
Timing Ability ◽  
Fund Industry

This article presents a unique test of the effectiveness of technical analysis in different sentiment environments by focusing on its usage by perhaps the most sophisticated and astute investors, namely, hedge fund managers. We document that during high-sentiment periods, hedge funds using technical analysis exhibit higher performance, lower risk, and superior market-timing ability than nonusers. The advantages of using technical analysis disappear or even reverse in low-sentiment periods. Our findings are consistent with the view that technical analysis is relatively more useful in high-sentiment periods with larger mispricing, which cannot be fully exploited by arbitrage activities because of short-sale impediments.

Hedge fund marketing by broker‐dealers questions and comments in response to recent developments

2003 ◽  
Vol 4 (3) ◽  
pp. 7-12
Author(s):  
Michael R. Butowsky ◽  
Michele L. Gibbons
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Internal Controls ◽  
Funds Of Hedge Funds ◽  
Recent Developments ◽  
Promotional Efforts ◽  
Fund Industry

This article discusses the implications of heightened regulatory attention to hedge funds by focusing on the practical questions that are on the minds of many in the hedge fund industry and, possibly, even in the thoughts of the regulators themselves. The primary regulatory condition relevant to the offer and sale of interests in hedge funds is the prohibition on general solicitation or general advertising by the sponsor of the hedge fund. Under NASD rules, brokers must (1) provide balanced disclosures in their promotional efforts; (2) perform reasonable‐basis suitability determinations; (3) perform customer‐specific suitability determinations; (4) supervise associated persons selling hedge funds and funds of hedge funds; and (5) train associated persons regarding the features, risks, and suitability of hedge funds and funds of hedge funds. Internal controls, including supervision and compliance, must include written procedures to ensure that sales of hedge funds and funds of hedge funds comply with all relevant NASD and SEC rules. Promotion of hedge funds must be balanced by a fair presentation of the risks and potential disadvantages of hedge fund investing

The Lost Decade for Hedge Funds: Three Threats

2021 ◽  
pp. 34-63
Author(s):  
Joseph A. McCahery ◽  
F. Alexander de Roode
Keyword(s):  
Mutual Funds ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Financial Industry ◽  
Market Environment ◽  
Direct Competition ◽  
Lost Decade ◽  
Recent Trends ◽  
Fund Industry ◽  
Asset Managers

The last decade has challenged the paradigm of the hedge fund industry as a unique performer. In this chapter three main factors are identified that have affected the operation of hedge funds: competition from mutual funds, the market environment, and tighter regulation. Recent trends in the financial industry have moved asset managers closer to hedge funds by introducing similar underlying strategies, such as liquid alternative funds, to directly compete with hedge funds. Such strategies can achieve performance similar to that of hedge funds, thus introducing more competition for hedge funds. Moreover, it is shown that several hedge fund styles that have traditionally worked well in crisis times—even in the last decade—are also strategies that can be replicated by liquid alternatives. Together with tighter regulation and a strong market environment, these developments continue to put pressure on the hedge fund industry. The chapter’s empirical findings add to the existing debate on the performance of hedge funds and the direct competition from liquid alternatives.

A hedge fund collapse and diversification 101: lessons to stakeholders

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Majed R. Muhtaseb
Keyword(s):  
Hedge Funds ◽  
Stock Price ◽  
Hedge Fund ◽  
Securities And Exchange Commission ◽  
Fiduciary Duty ◽  
Due Diligence ◽  
Content Type ◽  
The Public ◽  
Operational Risks ◽  
Fund Industry

Purpose The purpose of this paper is events and analysis of present a hedge fund collapse, offer lessons to investors and hedge fund industry stakeholders and propose a possible remedy for mitigating operational risks and associated potential losses. Design/methodology/approach This study focused on one hedge fund case study and conducted a thorough investigation of the events that led to the collapse and eventual filing of the Securities and Exchange Commission (SEC) complaint. All articles and publications used for this research are available in the public domain and accessible. Findings Wood River Capital Management had concentrated the portfolios of its two hedge funds into one stock, EndWave Corp. Fund Manager violated terms of offering memorandum. Investors were not made aware of and did not discover the operational risks. Stock price of EndWave plummeted. There was no independent oversight over the funds. The values of the two funds dropped significantly. Investors attempted to redeem but the funds were not liquid. The SEC filed a complaint. Mr Whittier was sentenced for three years in jail. Research limitations/implications It is an analysis of US-based hedge fund, not an empirical paper. The article presents critical analysis and offers many valuable lessons to hedge fund industry stakeholders. Practical implications This paper helps investors in terms of identifying a hedge fund’s operational risks and conducting more effective due diligence while vetting a hedge fund. This could potentially save investors and constituents billions of dollars, by avoiding potential hedge fund collapses. This paper suggests that the scope of fiduciary duty be expanded to cover hedge fund industry vendors. Originality/value Thorough research of a hedge fund that collapsed because of poor investment decisions, not self-enrichment at expense of fund investors. This paper provides lessons to investors in terms of identifying a hedge fund’s critical operational risks and conducting value preserving due diligence. This could potentially save hedge funds investors billions of dollars, by avoiding potential hedge fund collapses. This paper recommends that the scope of fiduciary duty be expanded to cover hedge fund industry vendors.

Trends and Future Prospects of Hedge Funds

2017 ◽  
Author(s):  
Hunter M. Holzhauer
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Historical Context ◽  
Cost Savings ◽  
Short Term ◽  
Fund Managers ◽  
Potential Impact ◽  
Fund Industry

This chapter focuses on new trends in the hedge fund industry. The chapter begins by creating some historical context for the current perception and state of hedge funds. The remainder of this chapter focuses on the following trends and their potential impact on the industry: (1) growth in all areas of the industry, especially in terms of long-term capital flows from institutional investors; (2) uncertainty about growth in the short term; (3) ways hedge funds approach growth; (4) the need for more diversity among hedge fund managers, including more minorities and women; (5) diverging long-term objectives for larger and smaller hedge funds; (6) future cost savings to investors; (7) development of new investment options to address liquidity concerns for investors; (8) new regulations; and (9) the future role of technology in the hedge fund industry.

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