Hedge Fund Execs Advocate Credit Default Exchanges

Testifying before the House Oversight and Government Reform Committee onThursday 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 that 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 committee 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 at the start of the year set off a domino effect that has resulted in the worldwide financial crisis.

Certainly, hedge funds are bracing for regulations, giving the political stances of president-elect Barack Obama. Ninety-eight percent of senior hedge fund managers surveyed after the election said they 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 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 top executives at hedge funds. “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 the hedge fund executives at large firms with $750 million or more in assets said they believe new regulations will make it harder for them to raise capital, while 41% of those at smaller firms thought so.

On the bright side, however, only 6% believe new regulations will cause hedge funds to close up shop and 10% think it will preclude them from becoming public companies.