Reuters- Hedge funds should establish a self-regulatory organization and avoid taking money directly from average investors to avert government scrutiny and a possible public backlash, a former headof the U.S. Securities and Exchange Commission said on Wednesday.
In remarks to a conference of the New York State Society of CPAs, Harvey Pitt said he believed the estimated $2 trillion hedge fund industry had increased the overall efficiency of capital markets by providing much-needed liquidity.
But the funds, which regulators have largely left alone and free to pursue high-risk strategies, could see that change if they move away from courting sophisticated, wealthy investors and try to woo average investors, Pitt said.
“Hedge fund investment strategies which involve exposure to arcane, illiquid, or complex financial instruments increase the challenges for investors,” Pitt said, citing the difficulty that even sophisticated investors face in learning the true valuations of hedge fund assets.
He suggested if firms try to tap average retail investors for funds, or attempt to raise “permanent capital” through public offerings, they may invite regulators’ oversight.
