Self-Regulation of Hedge Funds

Hedge Fund Group is paying me a small stipend to blog about its Certified Hedge Fund Professional (CHP) designation. That's great because probably I would have done it for free! Here's why:

1) I believe that Americans have come to rely far too much on the government to solve (or more usually attempt to look like solving) problems that it is not designed to address, much less fix. Seriously, how can 100 Senators and a couple of hundred Reps, the vast majority of whom know little to nothing about finance, let alone an ever-changing beast as complex as the hedge fund industry, create effective regulatory legislation? The odds of success are vanishingly small.

2) The U.S. financial industry has a long history of successful self-regulation. I'm not kidding! The NYSE is probably the most famous of the many SROs (self-regulating organizations) that, though not without occasional lapses, have prevented the sort of investor expropriation that has short-circuited the development of numerous economies in Latin America, Africa, Central Asia, etc. Professional designations such as CPA, CFP, CFA, and so forth are part of the SRO apparatus because of the knowledge and technical expertise that holders must demonstrate, usually on rigorous blindly scored examinations, before becoming certified. During the healthcare/insurance debate of 2009-10, many Americans were outraged at the suggestion that government bureaucrats might replace the American Medical Association (AMA), the medical community's major SRO. They should also bristle at any attempt to weaken financial SROs and in fact should encourage pro-SRO legislation.

3) The CHP appears to be a worthy attempt to help hedge fund managers to self-regulate. Started in 2007 in Boston by experienced risk management expert Richard Wilson, HFG now has over 20,000 members because its CHP caters specifically to hedge fund professionals. To meet the needs of those professionals, HFG is growing quickly and also expanding its training programs and videos and will probably continue doing so in the future as its forebears in banking, insurance, and personal investing did. There is a demand for good people in every industry and HFG is doing a great job increasing the supply, both by increasing the knowledge of people in the industry and by allowing those with its designation to signal their knowledge more effectively to hedge fund managers.

4) Getting CHP designation empowers job applicants to land the positions they want, helps hedge funds to hire the best and the brightest, and, I believe, promotes financial sector stability. Many hedge fund strategies entail taking large amounts of risk. Although much of that risk is so-called "tail risk" (i.e., highly unlikely to occur), individual hedge funds and even entire hedge fund sectors could fail, roiling financial markets (e.g., your 401K). Government cannot really stop people from taking risks (look at the miserable job it has done eliminating pot, crack, murder, rape, and risky banks) but the hedge fund industry itself can minimize the risks and collateral damage by ensuring that the people working in the industry are as intelligent and well-trained as possible. One great signal of those attributes, and perhaps the best currently available, is CHP designation. So if you are in the hedge fund biz, know someone who is, or just want to help keep government waste in check, read this FAQ.