Subject: File No. S7-30-04
From: Reza Vishkai
Sent: Monday, October 25, 2004 11:31 PM
Subject: "New hedge fund rules would be a false economy":
Paul Atkins makes very important points in "New hedge fund rule would be a false economy" about the misguided efforts of the SEC to regulate hedge funds. Not only do the impending regulations not achieve much in terms of protecting investors and may in fact provide a false impression of security, they seriously miss the point in terms of the real risks that hedge funds pose to the global financial markets and ultimately to retail investors and pension fund beneficiaries. The real risk from hedge funds arises from their disproportionate and misunderstood exposure to capital markets through the use of leverage, derivatives and exotic securities, which is significantly greater than the US$ 870 billion suggested by Mr. Atkins. It is the desire for this exposure in pursuit of high returns, which makes hedge funds such attractive and profitable business for the prime brokerage arms of the major investment banks. The result of the massive conflicts of interest arising from not only hedge funds being far more attractive clients than traditional investment managers but also due to many of these same brokers having invested principal capital in hedge funds, ostensibly to seek investment returns but in many instances to "buy" the business, means that the brokers are loathe to limit and effectively manage their risk exposure to hedge funds. This combined with the genuine inability of some of the risk management departments of the large banks to measure the total exposure and to take ownership of the inherent risks, means that the financial markets are more susceptible to spiralling out of control as a result of a few hedge funds being on the wrong side of a large move than at any time in the past. Retail investors and pension fund beneficiaries need not have investments in hedge funds to feel the impact of a severe correction in the financial markets in that scenario. The SEC and other regulators would provide investors with greater comfort if they focused their attentions on identifying and managing the real risks that hedge funds pose through demanding more accountability, higher standards and greater transparency from the prime brokers. They could even consider leaving "investor protection" to the likes of Mr. Elliot Spitzer who has done more to protect retail investors than the SEC could ever dream of.