Meet the Less-threatening Hedge Fund

Who us -- a threat to the economy? Hedge funds are scrambling to convince The Fed that they pose no systemic risk to the US economy whatsoever. For fund managers who are known for their huge and elevated egos, they are now downplaying their funds' importance and impact so that the government can turn their gaze elsewhere.

It's like Jessica Alba putting on baggy sweats and no makeup and saying she was homely in high school.

Why the sudden modesty? This morning Reuters reports that the newly created Financial Stability Oversight Council are starting to determine which non-banks pose a risk to the financial systems. In short, they are trying to avoid a meltdown like the occurred after the collapse of Bear Stearns and Lehman Brothers. While few people think that Bear Stearns did not deserve to fail, there are many observers who feel that the collapse of Lehman Brothers was a mistake.

The last thing any hedge fund manager wants is greater scrutiny. They may grin and say "bring it on" but deep down the last thing they want is the government looking into their business. Oversight is a nightmare: You have to hire consultants and employees to shore up your operational risk. You have to invest in new software and hardware to store the data, analytics and dashboards to make sure you're coloring inside the lines. And don't forget to hire a smart legal team for the inevitable audits and lawsuits that happen in the quest for transparency.

Compliance is a full time and thankless job and to avoid this, hedge funds will do almost anything to get out of this chore. It will be interesting to see if funds chop themselves into smaller units to avoid this scrutiny. Advanced Trading will be on the look out.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio