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Another man’s pain is another man’s gain and more so now than ever. The beleaguered hedge fund industry is rife with talk of consolidation as the downturn provides an opportunity for larger firms to acquire smaller firms at a bargain rate. This is driven by dramatically shrinking assets making the smaller firms not the lucrative business they once were. This is leading to businesses being sold to a larger partner that can keep assets managed at a minimum level. However, in an industry dominated by individual managers and executives, barriers to deals still remain. For instance, having built up a business during the good times, executives may be reluctant to see it absorbed by a larger firm. There are a lot of egos with executives wanting to be the consolidator rather than consolidated as the entrepreneurial spirit defies logic. The entrepreneurial spirit exists as hedge due to opportunities driven by minimal regulation. Hedge funds have built a reputation of being lightly regulated in comparison with mutual funds as hedge funds do not fall under the 1940 Act because they participate in ‘private offerings’ to sophisticated investors alone unlike ‘public offerings’ of mutual funds. Academics, industry professionals, and regulatory authorities overwhelmingly agree that due to much less regulations, hedge funds benefit the economy by mitigating price downturns, bearing risks that others will not, making securities more liquid, and ferreting out inefficiencies. Compared to mutual funds, hedge funds are less restricted and transparent and they prosper for it…until now. This has forced the question of whether the high returns outweigh the high risk. In this economic climate, many are saying no. One solution to this scepticism is to introduce better regulation. This would produce more accountable hedge fund managers in future and the investors would be able to simply research the background of a hedge fund manager before entrusting their money into his or her hands. The result is beneficial for both investor and hedge fund as regulation would produce a safer hedge fund market that would attract a larger number of investors. With increased industry regulation the mergers and acquisitions of hedge funds could increase as executives calculate the viability of operating under red tape.
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