Well, the SEC is upon hedge funds, and by next January widow and orphans will be much more protected by new registration requirements (like most funds, our fund is starting the process early). You have to love childlike optimism in the face of failure, if only because a more appropriate disdain is merely tiring. You see, if you register that you are going to not do bad things, you are less able to do them. Or is it less willing? Whatever.

In general, a hedge fund employee can't say what his fund's returns have been (excepting to "qualified investors" by appointed personnel of the fund). Ask your hedge fund buddy how he did last year, and if he's smart he will say "ok" (meaning ok or good), or "not too bad" (meaning something better than the LTCM or Niederhoffer lower bound). One can't say much more about the nature of one's fund for fear of appearing to solicit funds. I feel like part of an Al-Qaida sleeper cell.

All email is archived, forever, and all employees must sign several pages documenting we read 100 pages of prosaic rules (don't front run! no insider trading!). Therefore most correspondence of substance, as opposed to boilerplate tripe, will be conducted on the phone. After all, how specific would you be in an email given that your colleagues (now and future) can read you email, and the more specific and relevant you are, the greater chance anything you write can be used against you, someday, in a court of law.

So we have lower quantity and quality of information transferred from hedge funds to outsiders. Clearly, registration works its magic in mysterious ways.

It would be hard to argue that hedge funds have been a riskier investment, on average, than the previously registered mutual funds (see CSFP's indices here). Fraud and crimes like insider trading, or front running, are currently illegal under a variety of existing statutes, and it is doubtful that registration does anything to ameliorate this.

Recent SEC history is nicely summed up by Mark Astarita:

The Commission trumpets the scandal as its prime example of hedge fund fraud and the need for regulation, in order to have early detection.

This is certainly a joke. First, the SEC did not discover the mutual fund timing scandal; the state securities commissioners did so.

Second, the state securities commissioners uncovered and investigated the fraud based on information from whistleblowers, not because the mutual funds were registered.

Third, the mutual fund timing frauds were in fact uncovered, without registration of the handful of hedge funds that were involved, without registration of those funds.

And fourth, the mutual fund timers were not the ones violating the securities laws in most instances. The timing violations occurred in large part because the mutual funds themselves, or the advisors to the mutual funds, violated the prospectus disclosures of the funds. Let’s be clear here – the violations of law that have been alleged in the timing scandal were violations by the mutual funds, and their advisors – not by the timers.

And the mutual funds and their advisors are all registered with the SEC.

Let’s recap = the SEC needs to register hedge fund advisors so that it can prevent frauds like the mutual fund scandals. However, the SEC did not detect the mutual fund scandals, which were perpetrated by SEC registered broker-dealers and mutual fund advisors.

The first refuge of regulators is registration or licensing. This rarely does anything that actual lowers risk or increases safety, but it does increase the costs of entry, shows good intentions, and creates employment demand for the otherwise unskilled who must now implement these rules. John Stossel has made this point well in his book Give Me a Break, a great "airport read" (meaning it can be read, profitably, on a one-way flight).