Gilded Cage: Hedge Funds vs. Washington

In a Senate Banking Committee hearing last week, Greenspan signaled his opposition to an SEC plan to formally register hedge fund advisers, which would be the most intense regulatory scrutiny many of these managers have ever encountered.

"I grant you that registration is not a problem in and of itself," Greenspan said. "The question is what is the purpose of that, unless you're going to go further."

The Fed chief added that as long as hedge funds remained the province of wealthy and institutional investors, additional oversight would not be needed.

Nevertheless, the SEC budget grew 12.5% this year, and Donaldson has said he'd like to see some of that money used to hire another 106 SEC employees, some of whom would register and inspect hedge funds. The new budget calls for $18.7 million to go to expanding the SEC's staff.

Jack Gaine, president of the Managed Futures Association, which sponsored the conference at which Roth made his comments, said the SEC's concerns over "retailization" -- the spread of hedge funds to low- and moderate-income investors -- were unwarranted. Hedge funds, which usually require a minimum investment of $1 million and have strict rules about who can buy them, can take care of their own business without government help, he said.

"We don't want mom and pop as investors," he said. "We want the sophisticated investor in a private transaction that has been worked out within the existing legal framework."

Gaine also dismissed the idea that the SEC could have learned about widespread abuses in the mutual fund industry if it had been able to inspect Canary Capital Partners, the hedge fund at the center of the late-trading/market-timing scandal. In any event, Gaine said, memories of that debacle are fading.

"Last year, you would have said there was a 90-10 chance that there was going to be regulation of hedge fund managers," he said. "I would say the balance has shifted."