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House Passes Hedge Fund Study Measure

A bipartisan bill directing the President's Working Group on Financial Markets to conduct a study and report to Congress on the hedge fund industry passed the House by voice vote. The Hedge Fund Study Act, H.R. 6079, has the support of House leaders and represents an effort by Congress to learn more about both the risks and benefits of hedge funds in light of their explosive growth. While the numbers fluctuate, there are an estimated 8,000 hedge funds managing approximately $1 trillion in assets. The bill has been received in the Senate and, in order to become law, would have to be passed by the Senate during the lame duck session of Congress next month.

In a letter to Financial Services Committee Chairman Michael Oxley (R-OH), the Managed Funds Association applauded the bill as a pragmatic and responsible approach to examining the issues raised by the growth and importance of hedge funds to the capital markets. The MFA views the measure as a balanced and informed approach to examine not only potential risks to the markets and investors, but also the realized benefits of hedge funds to the economy and to the markets. The MFA also appreciates that H.R. 6079 requires the Working Group to make recommendations in a final report regarding efforts the hedge fund industry or regulators should undertake to improve practices.

The bill mandates that the study include the characteristics that define a hedge fund as part of an effort to come up with a federal definition of a hedge fund for the first time. Another topic of concern that must be analyzed is the growth of pension funds that invest in hedge funds. Further, the study must examine whether hedge fund investors can adequately protect themselves from risk, as well as the potential risks hedge funds pose to the markets. The Working Group is also directed to study international approaches to the regulation of hedge funds.

The report must include the Working Group's recommendations on proposed legislation relating to disclosure rules for hedge funds, including the type of information hedge funds should disclose. The report must also detail efforts that the hedge fund industry or regulators of financial institutions should undertake to improve practices or provide examples of successful industry initiatives.

A report on the interface between pension funds and hedge funds is particularly important to Congress because hedge funds have become increasingly tied to pension plans, according to Rep. Barney Frank (D-MA), the ranking member on the Financial Services Committee, who vowed to deal with the issue further next year. Rep. Christopher Shays (R-CT) said that the study and report are needed because strong oversight of the financial markets is critical to the nation's economy. While acknowledging that hedge funds, with their sophisticated investors, may not need the same level of oversight as mutual funds, Shays said that investors will benefit from increased transparency and a better governmental and regulator understanding of the industry.

James Hamilton