Regulation Does Not Decrease Risk - It Decreases Our Freedom

The Objective Standard has an interesting interview with The Capitalist Pig founder Jonathan Hoenig regarding Hedge Funds. He says that Hedge Funds are similar to mutual funds except they are required to accept funds only from "accredited individuals" that is people who have a liquid net worth of at least 1 million dollars or who make more than $200,000 a year. Mutual funds are regulated - Hedge Funds are not but there have been calls in Washington to regulate them. Here is what Mr. Hoenig says about this.

Hedge-fund managers, like all investors, allocate wealth to create more wealth. They do so by analyzing markets and placing capital in accordance with their best judgment. In a word, they do it by “speculating”—an activity that could be seen as a bad thing only by those who regard thinking, planning, and judging as bad things. In the aggregate, successful hedge funds create massive amounts of wealth by investing intelligently. This benefits their investors and spurs the economy in general...

I have to laugh whenever I hear that hedge funds are these unregulated bandits, running rampant through the capital markets and wreaking havoc at every turn. While laughably false, however, this idea fuels conspiracy theorists who claim that a secret cabal of hedge-fund investors is behind the scenes pulling the markets’ strings. Oil going up? Must be the hedge funds cornering the market. Stocks going down? Must be the hedge funds selling short. They are scapegoats for every market malady.

The reality is that hedge funds are already heavily regulated. As I mentioned earlier, hedge funds are limited by the government to wealthy investors. And while mutual funds and brokers spend hundreds of millions of dollars a year on advertising, hedge funds aren’t allowed to promote or publicly solicit business in any fashion. You’ve never seen a billboard, TV spot, or magazine or direct mail advertisement for a hedge fund—because such promotions are illegal. Can you think of any other industry that is subject to such oppressive constraints?

Additional regulations and higher tax rates for hedge funds will only further violate the rights of managers and investors, by further restricting their ability to pursue rational, wealth-creating investment strategies, and by seizing more of their hard-earned profits. ..

In a free market, Madoff could never have gotten away with such massive fraud, because in a free market, people don’t rely on bureaucrats to do their thinking. They rely on themselves and on paid experts and on reputable ratings agencies—which, in a free market, would not be in bed with the government, as many of them are today, because a free market entails complete separation of economics and state.

Regulation doesn’t eliminate fraud; it only short-circuits the market’s ability to detect it. Just as Sarbanes-Oxley didn’t eliminate financial crime after Enron, the forthcoming reregulation of the financial markets will not thwart the Bernie Madoffs. It will only violate rights, raise costs, and curtail growth. (READ Here in TOS).