As we have discussed previously, hedge funds, and the investment management industry, are likely to face increasing regulations in the future. As we look toward Congressional testimony by hedge funds (see Congress to talk with Hedge Funds on November 12) and by other government officials, we have decided to look back at previous GAO reports to see what issues the GAO identified as important.
The U.S. Government Accountability Office has released two reports this year on hedge funds. The first report (released in February of 2008) described the current hedge fund regulatory regime and some of the risks the current system posed. The second report (released in September of 2008) focused on some of the issues which pension plans must consider when investing in hedge funds. I’ve provided a brief overview of the objectives of the two studies below.
Additionally, this week we are going to examine the February report as it includes many of the issues which have surfaced because of the recent market events, especially with regard to counterparty risk. A list of the topics we will discuss this week include (links activated as soon as articles are published):
- SEC and Registered Hedge Fund Advisors
- CFTC and NFA and Hedge Fund Regulation
- Banks and Hedge Fund Oversight
- Hedge Funds and Investor Due Diligence
- Hedge Funds and Counterparty Risk
- Hedge Funds and Systemic Risk
- Hedge Funds and Market Discipline
- Discussion of the Previous Hedge Fund Registration Rule
The GAO Hedge Fund Reports
Hedge Funds: Regulators and Market Participants Are Taking Steps to Strengthen Market Discipline, but Continued Attention Is Needed
GAO-08-200 Released February 25, 2008 (for full report, please see PDF)
According to the preamble, “This report (1) describes how federal financial regulators oversee hedge fund-related activities under their existing authorities; (2) examines what measures investors, creditors, and counterparties have taken to impose market discipline on hedge funds; and (3) explores the potential for systemic risk from hedge fund-related activities and describes actions regulators have taken to address this risk.”
Defined Benefit Pension Plans: Guidance Needed to Better Inform Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity
GAO was asked to examine (1) the extent to which plans invest in hedge funds and private equity; (2) the potential benefits and challenges of hedge fund investments; (3) the potential benefits and challenges of private equity investments; and (4) what mechanisms regulate and monitor pension plan investments in hedge funds and private equity.
Other Related HFLB articles include: