Why Academics Need to Venture Out of the Ivory Tower, Part 76,198

22 Mar

Sure, Financial services, specifically Hedge Funds, are going to feel some pain from the Rajaratnam trial. To suggest that hedge funds should proactively disclose their strategies to remove this taint  is simply naive, at best:

Hedge funds should publicly report all past trades that are at least two years old. Such delayed disclosure would not weaken their competitiveness, since the half-life of most trading strategies is very short, but it would give them the credibility that comes with having nothing to hide.

I think you’d be fairly hard-pressed to to find any major hedge fund managers that would voluntarily disclose their trades, however aged.  Contrary to what Herr Professor says, 2 years is at best an arbitrary time period.  This would be analogous to suggesting (although not perfectly) that Coca-Cola voluntarily discloses older versions of the formula for it’s flagship soda to proactively stave-off criticisms and potential regulatory burdens.

It just ain’t gonna happen.

You think Steven Cohen, Bill Ackman, John Paulson, or even Chicago Boothe alums like Cliff Asness want to reveal all of their trades, even if they’re dated?  I highly, highly doubt it.  They’d no-doubt argue that so-doing would allow competitors to reverse-engineer their strategies, their “trade secrets.”  While so-doing may placate regulators and The Public seeking to gain greater transparency into private pools of capital, it’s simply not a realistic approach.

The fact of the matter is that many (if not most) HF managers DO have something to hide – or at least think they do – and they largely don’t care about having credibility with The Public/regulators that comes with having “nothing to hide.”

At best, I could see the SEC (or whichever relevant regulator) requiring funds to report aged trades to the regulator, but not publicly.   Funds would likely fight such regulation tooth & nail, but given alternate, more stringent regulations, may eventually capitulate, “may” being the key word.

The other thing the author misses, I think, is that The Public can hate hedge funds as much as they want, but since they are by definition (primarily) private entities, legislators and regulators can and will only allocate X% of their resources towards them.  So long as they can buy time, they can and have generally been able to avoid substantially increased regulatory burdens, at least of such intrusive variety.

The pitchfork & torch crowd may scream & shout about Magnetar or Paulson’s role in the Crisis, but there’s enough other, bigger, more public bad actors out there (real and/or perceived) that eventually, their ire will be focused elsewhere, and the big, bad HF managers will be forgotten.  Until the next time The Public goes looking for a scapegoat, that is…



4 Responses to “Why Academics Need to Venture Out of the Ivory Tower, Part 76,198”

  1. Vergil Den March 22, 2011 at 2:33 pm #

    And while they are out there proactively disclosing their stratgeies, maybe they will disclose their investors too. And why not – they surely don’t have anything to hide.


  1. "The Dark Underbelly of Finance" | Finance Blog - March 22, 2011

    […] past trades that are at least two years old" to show they are honest brokers, but that's not going to happen unless they are forced to do […]

  2. Tuesday links: definitive statements Abnormal Returns - March 23, 2011

    […] Is the hedge fund industry at risk of greater regulation due to the taint from insider trading?  (Project Syndicate, Economist’s View, Stone Street Advisors) […]

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    […] past trades that are at least two years old" to show they're honest brokers, but that's not going to happen unless they're forced to do […]

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