By Lawrence Goldfarb
When the Securities and Exchange Commission made clear its intention to impose registration and financial reporting demands on most hedge funds, critics accused the government of trying to fix something that wasn't broken. We may never know whether that was true, for the simple reason that hedge funds had already begun losing their edge, and for reasons that have little if anything to do with what the SEC was worried about.
If the SEC had truly been concerned about protecting hedge fund investors, it would have mandated that all hedge funds reinstate two things that have been conspicuously absent for some time now: volatility and real returns. According to CSFB/Tremont hedge fund index, hedge funds have underperformed the Standard & Poor's 500 stock index and Morgan Stanley Capital International equity world indexes over the past two years. That hedge fund index performance was worse than that of the global bond market. In the course of becoming virtually a mainstream product line, hedge funds have gone from being "alpha hunters" to "asset gatherers," the financial equivalent of Muzak. It's time to put the "edge" back in hedge.