Ask Fed Chairman Alan Greenspan if he thinks the SEC should have more regulatory power over hedge funds and he will answer with an unqualified "no" - as he did for the second time in a week with a response Tuesday to the chairman of the Senate Banking Committee.
And though a negative from Mr. Greenspan on some issues may settle the matter, it seems clear that congressional interest in this subject has not waned, meaning that the debate could go on for some time with an outcome that may be unpredictable.
Mr. Greenspan said in a written response to a question from Sen. Richard Shelby, released Tuesday, that hedge funds do not need additional monitoring. He wrote a similar letter last week in response to a query by Sen. Mike Crapo, who also is on the banking panel.
"Institutional investors have accounted for a growing share of hedge fund investments," Mr. Greenspan wrote Sen. Shelby, "and they can and should protect their own interests rather than rely on the limited regulatory protections that would be provided as a result of a registration requirement." The Securities and Exchange Commission recently proposed requiring registration of hedge fund advisers.
Mr. Greenspan told Sen. Crapo, "The proposal seeks to deter fraud and market manipulation, but it is unlikely to achieve those objectives." And if the objectives aren't achieved, he said, Congress could face "irresistible" pressure to expand the SEC's regulatory reach from hedge fund advisers to "hedge funds themselves."
SEC spokesman Matt Well told Dow Jones Newswires that the SEC is mindful of the balance between protecting investors and protecting the liquidity hedge funds can provide to U.S. financial markets. The SEC proposal would require a "minimal form of registration" by hedge fund advisers and permit SEC inspections of them, he noted.
Analysts said Mr. Greenspan is failing if he is trying to persuade Congress that hedge funds are still reserved for institutional investors. In recent years, they said, more individuals have begun investing in hedge fund of funds.
Hedge fund of funds let investors with as little as $10,000 take stakes in a diversified mix of hedge funds. Traditional hedge funds require a minimum investment of $250,000.
Van Hedge Fund Advisers said these products are growing rapidly. At the end of 2002, hedge fund of funds had 17% of all hedge assets. But this share doubled by June 30, 2004, to 35%, it said.
"I think Mr. Greenspan is wrong; these products are moving down-market," said Geoffrey Bobroff, the president of Bobroff Consulting.
