Steven Pearlstein has no pity for hedge funds that complained the Securities and Exchange Commission HF registration rule was too much of a burden. “It’s preposterous for an industry that can pay its stars $1 billion a year to claim it can’t afford the cost of compliance,” Pearlstein writes in his Washington Post column. But he does have a good suggestion: Rather than regulate the funds, regulate the investors. Meaning, specifically, pension plans, which are now the single biggest source of inflows into the industry. Pearlstein says one can’t blame the hedge funds for pitching to pension plans, but “you can blame state and federal pension regulators who have turned a blind eye to the added risk that pension managers are assuming.” Calling this a “back door” approach to regulation, Pearlstein recommends that pension funds should be restricted to investing only in funds that register with the SEC and that follow disclosure rules. Same goes for bank regulators, which have allowed the institutions to get “hip deep in financial high risk hedge fund investment and trading strategies.” Let banks also limit their lending to SEC-registered funds, he says. “Regulate hedge funds? Why bother,” Pearlstein concludes, “when you can just as easily regulate the outfits that invest in them, lend them money and execute their trades.”
