Sebastian Mallaby on hedge funds

Whatever, we should probably count ourselves lucky that an outfit like the Basel Committee did not regulate hedge funds… otherwise they might have leveraged up to 50 to 1 or more… like our supervised banks.

" . . . allocate resources toward places where those resources won't be treated best, only growing government and inefficiency in the process." . . . like 15 yr old soccer stars and bad movies?

Hedge Funds or Hedged Funds are educated bets. This is a basic premise of business and needs to happen, and has happened long before it had this name.
In slower times we would have possibly bet on a ship and crew to bring a valued item. Our ship came in( or it sank at sea). Our fortunes are made( or lost).
What has given this form of commerce(gambling) a bad name are the Multinational Banks that have bet clients money without asking or rigged the bet against some clients for the benefit of other clients which included the bankers themselves. What is most offensive is to have those same banks and bankers cry for help when things went badly.
So they got relief from Governments at the expense of tax payers.
Hedge Funds and Multinational Banks are a combination with inherent flaws.
Save the hedge funds for investors and the banks for those that are risk averse(savers).

Only know-nothings and social liberals (patrician types with strong central governemnt inclinations) would suggest that hedge funds require more regulation.

First, most of these 'managers' are really quite weak. They tend to fail misrerably and within a year or two. [They all argue that they're creating alpha (non-systemic returns) but in fact the management of bonds regressed on stocks would produce only non-systemic return, not a good measure of performance.]

Financial system crises are a function of three behavioral anomalies that are allowed to run wild: credit booming, procyclical behavior among bankers, and the little studied (but for Allen and Gale) risk shifting.

Aggressive pre-emptive inflation targeting should bring asset prices into correct alignment with fundamental values. Bernanke and Gertler, among others, have amply demonstrated this.

Frankly I'm a little surprised that you guys haven't looked more closely at the writings of people like Bernanke, Gertler, Eichengreen, Mishkin, Blanchard and Allen and Gale.

That said, good financial system measures would include restoring the uptick rule, SEC registration of all firms discretionarily managing over 100 million dollars in publicly traded securites, and enforcement of existing margin requirements (no more than 2x) on those portfolios.

Don't persistently argue for enlarged government intervention. It doesn't work; rather, it serves to allocate resources toward places where those resources won't be treated best, only growing government and inefficiency in the process.

Bruce Eshbaugh, CFA, MSc (Lond)