Why are hedge funds not regulated? In 1998 the spectacular failure of Long Term Capital Management ( actually in business for a few years ) required the intervention of the Federal Reserve and major Wall St. Firms to avoid collapse and default of catastrophic proportions. LTCM in fact did abide by margin requirements but exceeded prudence by overextending itself in illiquid financial instruments. So when the Russian default on debt occured the fund was trapped and failed. And last month Amaranth Advisors closed up after losing $ 6billion in natural gas futures. They literally bet the company on natural gas . Normally funds in a regulated environment place many diversified financial bets because anyone can be wrong.
In years passed legislation would have been passed to tighten up on margins and oversight particularly in respect to the liquidity and size of positions. I.E. after the '29 Crash, The Glass-Steagall Act of 1932 and The Banking Act of 1933 were passed to seperate banks from the brokerage business. Incidentally Glass-Steagall was removed by Congress about the same time of LTCM collapse.
Without regulation hedge funds have grown exponentially in the past 5 years. Assets under management now total $ 1.2 trillion which is a double in that time period. Hedge fund charters have mutated to include investments into almost any financial vehicle. Lately those financial vehicles include buying sub-Saharan junk bonds, real estate in the Middle East, motion picture financing, commodity momentum investing, etc. Kind of makes LTCM's investments relatively prudent.
With no up-dated regulation and friendly banking relationships, aided by Glass-Steagall's removal, margin and adequate equity are a problem right now. Who's going to watch out for money borrowed on junk African bonds to finance Middle East property speculation to parlay into motion picture production so there will be funds for commodity momentum investments?
Troubles a'coming. It's spelled with a capital H and that stands for hedge fund.