Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

CHAPTER 5

Regulatory Regime Changes and Impact

Underlying the conversation about service providers, aligned interest, and due diligence is regulation. Since the financial crisis, hedge fund managers have seen a wave of new international regulation aimed at monitoring systemic risk and protecting investors. Here we outline the highest profile of the lot, and how they can impact hedge fund managers specifically. A full resource for further reading is provided for each regulation in its given section.

DODD-FRANK ACT¹

In the United States, the response to the 2008 crisis was encapsulated in the Dodd-Frank Act. The law itself is hundreds of pages and contains far reaching regulations for banks, brokers, and all corners of the financial landscape in the United States. Alternative investment firms couldn't escape without also being affected. Title IV² of the law deals with hedge funds specifically, and what they must now do to comply with the law.

The crux of Dodd-Frank is aimed at monitoring what regulators call systemic risk. Basically, they want to be able to see which financial firms are taking out the biggest positions, and when to either step in or closely monitor them as necessary. Regulators want to avoid, or at least monitor, new bubbles in the economy such that when they burst like mortgages did in 2008, the fallout is contained. Whether this is actually possible under this legislation is an open question, but this is one of its core goals.

We're focusing on systemic risk because ...