The costs and benefits of hedge fund disclosure

Cite this Article
Larry Ribstein, The costs and benefits of hedge fund disclosure, Truth on the Market (February 03, 2011),

The WSJ reports on proposed rules forcing hedge funds to disclose confidential proprietary information:

Under current rules, many managers are required each quarter to publicly disclose their long equity positions in public securities. The proposed rules would require a much greater level of disclosure to regulators about trading positions, counterparties, liquidity, leverage and performance. * * *

“WikiLeaks has more or less proven that anything you give to the government you have to assume could one day be public,” said Nathan Greene, a lawyer with Shearman & Sterling LLP who represents hedge funds, referring to the leaks of thousands of diplomatic cables in recent months.

“It is impossible, after seeing State Department cables, to say to yourself, ‘I’m going to package my most sensitive business information and give it to the U.S. government,’ and do it without a pit in your stomach,” he said. * * *

Systemic-risk monitoring has long been under consideration for the hedge-fund industry.

Onerous disclosure regulation of hedge fund trading positions is costly and unnecessary, as I’ve discussed:

Hedge funds are not part of the systemic risk problem.  It’s more likely they’re part of the solution in the sense that they use proprietary and business methods to bet against the accepted wisdom, rather than following all the other lemmings off of financial cliffs.  For a good statement of this argument, see Jon Macey, Promises Kept, Promises Broken, 275-82 (2008). Increased disclosure may reduce the funds’ incentives to invest in developing these strategies, which could actually increase systemic risk.

More generally, as I’ve said, hedge funds, through short selling and takeovers, have been an important source of market discipline.

And then there are also the risks that (1) the SEC won’t effectively guard the information; and (2) won’t effectively use the data it gets.  Here’s more bearing on those issues.