A New Model of Hedge Fund Regulation: Shorting Federalism or Bernie’s Nightmare

Abstract

Current proposals for reform of the financial markets regulation usually build on the same paradigm as the pre-crisis regulation. This paper, in the field of hedge funds and other alternative investment funds, proposes an alternative regulatory structure based on the new governance scholarship.

The proposal consists in allowing, within certain constraints, the coexistence and competition of multiple regulatory frameworks for hedge and other alternative investment funds. A framework could be private or public, domestic or foreign, institutionalized or not, and would be subject to authorization by the respective regulators. Terms of such authorization would be negotiated between the industry and regulators and renegotiation would be possible. Frameworks would not be limited by national borders, exact statutory qualifications or legislative petrification. Each fund (and its manager) would choose and could also change the framework to which it subscribes, subject to such framework's own rules.

The model should reduce regulatory capture and overload, harness the power of informal networks in the industry and eliminate the problems arising from regulatory forum shopping and related protectionist responses. It should also create an appropriate platform for search of proper regulatory responses and a system of checks and balances between the legislator, the regulator and the regulated industry.

Keywords: hedge funds, alternative investment funds, private equity, venture capital, regulation, governance, new governance, legislative proposal

JEL Classification: K22, G28