The Hedge Fund Manifesto- In Defense of Our Industry

Submitted by Optiondragon, Viet Ly

In every profession you have the bad apples and the good apples. It is important to separate the two and not make generalizations on the many for the ghastly deeds of the few. The general public, investors and the media should refrain from vast negative generalizations on the many thousands of great hedge fund managers and their firms. Hedge funds are a highly evolved and important piece of the financial ecosystem. Financial innovation, risk diversification and flexibility to the system are strengths added by the hedge fund industry. Hedge funds are value creators and support many functions to the investment system bringing returns outside of the normal market correlated returns. If they aren’t creating value, they are dropped and removed and the survival of the fittest continues. Pension funds, endowment funds, fund of funds, institutions, individuals and charities are all helped by hedge funds, and thus they directly or indirectly impact the returns on investment of millions if not billions of people. The problem in the past and now has been the lack of correct efficient regulation and the right regulatory framework to help separate these rotten apples from the golden ones. I beg for regulation, I ask Congress to please help us get rid of these charlatans and thieves within our industry who bring down our good name. Proper and efficient regulation and framework will help the system as a whole by helping restore confidence, raising the barriers to entry and thus raising product and management quality within, help legitimize the system, eliminate the charlatans and removing those who can no longer create real value. The hedge funds that are in the system benefit from the removal of such riff raff, who have encumbered the process of capital raising and reallocation, lowers competition by raising the barriers and increases the pie for those deserving and who continue to provide value. So I ask that our industry help Congress draft legislation and strike a balance of efficient regulation that doesn’t punish those operating ethically and innovatively, let’s help craft regulations that will help our industry as a whole. The problem now isn’t excessive leverage and lenient credit; it is a crisis in confidence! If there was any white collar crime deserving of capital punishment Mr. Madoff would fit the bill. Madoff and other charlatans have caused a huge black eye for our industry and in Madoff’s wake caused what is reported to have affected 3 million people worldwide either directly or indirectly.

Madoff’s whistleblower Harry Markopoulos was recently in front of Congress to help give advice on what congress should do in order to help prevent this type of fraud from occurring and below are his ideas for helping bring confidence back to the system and eliminating the thieves that operate within our industry:

• We need to fix the regulatory framework in order to fix the regulatory gaps; this could mean creating a super agency above the SEC, FINRA and insurance regulators. The agency needs to be as big as the firms they watch, instead of an “army of ants”.
• Giving adequate resources and hiring specialized and knowledgeable personnel in the agencies.
• Creating a combined cross agency task force to help uncover large sophisticated frauds.
• A centralized database shared by all agencies; Madoff routinely exploited gaps in the regulatory framework and was caught in 1992 but this was not seen by other agencies.
• Adequate, generous rewards for whistleblowers; 54% of frauds are uncovered by whistleblowers only 4% from auditors and specialists, whistleblowers are usually blacklisted in their respective industry so the reward must be worth the effort, this could also help eliminate the horrendous amount of letter scams by taking down the leaders of these groups who prey upon our public and siphon a large amount of wealth from our system.
• WEALTHY PEOPLE and SOPHISTICATED INVESTORS DESERVE GOVERNMENT PROTECTION; it is imperative to understand the trickle down effects of large frauds (charities, scholarships, millions of people dependent upon their services) and how they become large (wealthy investor and institutional pooling), and that frauds can become large enough to become a systemic risk to the system; also understanding of the large indirect collateral damage due to frauds outside of monetary values such as weakening investor confidence, consumer spending, elimination of scholarships thus a detriment to education and impact on low income services for the needy.
• Separate the custodian and the auditors from the firms they work with, and eliminate conflicts of interest within the agencies and the personnel; the Madoff scam was run all in-house.

Global investors and the investing masses will not step in to the system if they feel the framework is not protective enough and/or unless their confidence is restored in the system. I can’t effectively do my job if I have to constantly defend my profession and industry due to the actions of the few. This is one variable why the economy and markets are suffering but it can be corrected and shored up with the proper changes. We must start now and change the things we control and the rest will hopefully follow. It is imperative that the good golden apples stand up for their good name and industry and attack on the public relations front whether it be through the media or at public speaking events. Let’s fight. Tell others that in any profession you will have the good and the bad, how important it is to separate us and look at us as individuals and on our own merits. We are in the midst of a great purging, a much needed evolution. Let the content of our character and the merits of our firm be their guide, let the soundness of our corporate structures and due diligence be our pathway.