Testifying before the House Oversight and Government Reform Committee last Thursday on the role of hedge funds in the credit crisis, five prominent hedge fund executives said they would be in favor of establishing a public exchange or clearinghouse for credit default swaps (CDS) to make the market more transparent.

"An open and transparent market for these transactions would reduce confusion and improve understanding" of CDS, said Philip Falcone, senior managing director of Harbinger Capital Partners Funds.

In welcoming the five executives to the hearing, each of whom earned more than $1 billion in 2007, committee Chairman Henry Waxman (D-Calif.) said the government is trying to prevent hedge funds from having a detrimental impact on the financial system in the future, particularly since the demise of two $1.8 billion hedge funds at Bear Stearns set off a domino effect that has resulted in the worldwide financial crisis.

Certainly, hedge funds are bracing for regulation, giving the political stances of President-elect Barack Obama. Ninety-eight percent of senior hedge fund managers surveyed after the election expect regulations to be put into place, and 84% believe rising compliance costs will make their businesses more expensive to operate, Dow Jones reports. That said, only 9% believe they will be able to pass along these increased costs to investors.

Even if formal regulations are not passed, 75% said they expect regulators to take a closer look at their fees, asset valuations, counterparty risks, capital raising, leveraging and disclosure. Less than one-third, however, expect regulators to pry into their closely guarded investment strategies.

"The election's focus on the economy left many with the impression that regulatory reform will be a priority for the new regime," said Howard Altman, a managing principal at Rothstein Kass, a financial services firm that sponsored the survey of 313 hedge fund managing directors. "While the scope of these efforts is not yet defined, it is apparent that the hedge fund industry believes that regulatory action is on the horizon."

About 51% of executives at firms with $750 million or more in assets believe regulations will make it harder for them to raise capital.

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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