The Conceptual Underpinnings of Onshore Hedge Fund Regulation: A Global and European Perspective

Abstract

An informed decision on the rationale and contents of hedge fund regulation presupposes a matching of the various justifications for financial market regulation with the perceived risks and benefits of hedge fund investing and a discounting of those regulatory intervention rationales that cannot be shown to be of relevance to hedge funds. This article seeks to achieve a three-pronged objective: examine the applicability of the conventional rationales for financial markets regulation to hedge funds, in the light of their peculiar risks and benefits; inquire into additional, sui generis rationales of relevance to the regulation of European hedge funds; and examine some of the most frequently invoked objections to hedge fund regulation with a view to ascertaining whether these might cancel out the legitimate reasons why the industry could be the subject of normative intervention. It will be argued that macro-prudential, systemic considerations provide the main justification for hedge fund regulation, although the need to ensure the continuing contribution of hedge funds to the achievement of socio-economically beneficial objectives provides complementary arguments for a systematic public-policy response to the challenges thrown up by the industry's growth.