Federal Reserve Chairman Ben Bernanke said Tuesday that market discipline is a better regulator of the $1.2 trillion hedge-fund industry than government, embracing the free-market views of his predecessor, Alan Greenspan.
“The primary mechanism for regulating excessive leverage and other aspects of risk-taking in a market economy is the discipline provided by creditors, counterparties and investors,” Bernanke said in a speech to an Atlanta Fed conference on hedge funds at Sea Island, Ga.
Bernanke’s comments, his first to hedge-fund managers since becoming chairman in February, are consistent with Greenspan’s views that regulators would probably create more harm than good if they tried to write rules for an industry that thrives on speed and inventiveness.
Hedge funds, loosely regulated investment pools designed for wealthy investors and institutions, have grown from a Wall Street cottage industry managing $39 billion in 1990 to overseeing endowments such as Yale University’s and pension funds such as the California Public Employees Retirement Fund.
Banks and brokers have “strong incentives” to monitor their counterparties, Bernanke said, and the best access to information.
“Bernanke is taking a very realistic approach,” said Stephen Brown, finance professor at New York University’s Stern School of Business, who has studied hedge funds. “The Fed can promote self-regulation. Self-regulation is in the interests of the industry.”
