Hedge funds risky for Street, says Sirri

The House Financial Services Committee heard testimony today about risks hedge funds may pose to the investors and the economy. While the Securities and Exchange Commission has taken measures to protect hedge fund investors against fraud and market manipulation, more rules are in the works, said Erik Sirri, director of the SEC’s division of market regulation, to the Financial Services Committee. Among the possible new measures is a rule prohibiting hedge fund advisers from making misleading statements to investors, Mr. Sirri said. He also noted that hedge funds may pose a risk to major Wall Street firms and the financial system itself. “A hedge fund may grow so large in absolute terms that a forced liquidation could lead to a broader unwinding of positions and otherwise disrupt the markets,” Mr. Sirri said, citing Amaranth Advisors’ losses related to natural gas derivatives last year. The SEC has been meeting with officials at Wall Street firms to discuss risks, he said. Regulation should strike a balance that would protect investors but not chase hedge funds and their capital offshore, said Financial Services Committee ranking member Spencer Bauchus in his opening statement. He applauded the President’s Working Group on Financial Markets for its conclusions that market discipline combined with limitations on who can invest in a hedge fund would mitigate industry risks.