Hedge Fund regulation part 2
For all the hand wringing in Canada about regulating hedge funds (the U.S.A. is going in the other direction) in the wake of the Portus mis-adventure (as raised here last week), you have to wonder why there hasn’t been more consistent attention brought to bear on the individuals who write and publish “investment letters” that promote certain stocks.
Just yesterday, for example, a Tier 2 TSX Venture-listed company named Ditem Exploration (DIT-TSXV) saw their shares rally about 100% on record volume. Why? It couldn’t have been the company’s press release announcing that they had arranged for some further surveying of their uranium properties. The price of the metal did move in a bullish fashion, up US$10/lb to US$85. But from all anyone can gather, a newsletter geared for the retail investor is rumoured to be planning to highlight the company’s shares and, volia, the stock doubled on wild volume; or at least that’s the best guess.
And while Jim Dines might be the best stock picker in the world, he serves as a good example of how powerful a newsletter can be; even the rumour that a newsletter is looking at a public company seems enough to move stocks. Whether or not his newsletter did or didn’t publish on DIT is only known to his subscribers, but the evidence of market-moving power is there in spades.
For all the benefits that further transparency might bring to the sale of hedge funds by unregistered would-be Canadian portfolio managers, you’ll spend a long time scouring the websites of stock-pickers like Mr. Dines in search of a section about “risk”, or “regulation”, “we are already long this stock before we recommended it to you” or “check with your own financial advisor”.
They do use the word “clairvoyant”, however.
But the front page of the website makes it clear that this fellow is offering “advice and information for traders and investors”. Don’t you have to be licenced to give individuals investment advice for a fee?
What’s the point of putting a compliance officer into the office of a $30 billion hedge fund if retail investors continue to get exposed to this kind of speculative stock advice? And if Brian Costello needed to be pursued, why tackle pension fund-backed hedge funds and not the printer’s devils at the newsletters?
I have always taken the view that hedge funds need scrutiny and regulation. It is to the benefit of the consumer that there is full disclosure along the way. Although there are many myths about hedge funds that are not true, like they are full of lofty managers aimed at hurting the economy when if fact they are serving to make it more efficient and stable.
Hedge Funds by name are kind of misleading. I think what needs to happen in American regulation is that we distinguish between what traditionally would be known as hedging, protecting ones capital, and an Investment Fund that takes positions in the markets. It would be nice to have some legislation clarify the difference. They have Investment Funds in Ireland and I think that this is what they should properly be called.