Hedge funds play an important role in financial markets as they invest with significant financial leverage which can impact markets in various ways. There is a lot of debate surrounding the role of hedge funds and more importantly the level of control and regulation that should be put in place to manage their operations. Because of the high level of leverage hedge funds employ and the risk they take on, investments by hedge funds can have an impact on market prices and sway investments for individuals in a way that should be under higher scrutiny by the general public. The idea that hedge funds carry a level of sophistication in investment strategies thus require less regulation does little to reassure the common investor who has seen hedge funds act in ways which can be seen as unfair or shady. Particularly, as a common investor it feels as though hedge funds have an unfair advantage. Not just from the expertise of the investors employed at hedge funds, but because hedge funds have the power to move markets, utilize technology through high frequency trading, and hide their actions from the public. The idea that regulation may decrease substantial returns for hedge funds may in fact be true. However, the benefits to a fair and balanced approach to investment regulation is something that should be the goal of regulation in the first place. High net worth individuals shouldn't be allowed the cover of hedge funds to manipulate the system in ways that mutual funds cannot.

Additionally, there are considerable cases where hedge funds make market moves that provide value for investors but exacerbate issues within the market as a whole. One of these particular instances can be seen in hedge fund's role in decreasing affordable housing for individuals last year. This was done by hedge funds buying up single family homes as the housing market boomed last year and supply of homes was drying up. Increased regulation of this type of predatory behavior by hedge funds is necessary to ensure individuals have a chance to enter the home buying market at an affordable rate and build personal wealth. The lack of regulation on these types of moves by hedge funds creates an overall detriment to society as it continues to make income inequality worse among the population by gate keeping the housing market to those with significant capital. Thankfully, some laws are already being floated to limit these practices and put caps on how many homes can be bought by hedge funds and investors. Overall, when it comes to regulation of hedge funds and the market in general, my opinion is that the goal should be to make a level playing field for investing. Therefore, forcing hedge funds to be more transparent is crucial to maintaining this balance, particularly as the hedge fund industry's influence and capital has continued to grow over the years.

Question:

1)  After reading the opinion above, What is your response? What may be some risks or drawbacks? Please be detailed in your opinion.

Answer rating: 100% (QA)

One potential risk is that excessive regulation may stifle innovation and creativity in investment s... View the full answer