In Search of Market Discipline: The Case for Indirect Hedge Fund Regulation

Part I of this Comment will provide an overview of hedge funds, describe the failure of direct regulation of hedge funds, and analyze the failure of free market restraints. Part II will discuss the theory of indirect regulation, compare and contrast it to direct hedge fund regulation, and apply the theory of indirect regulation to hedge funds. Part III will discuss the mechanics of the proposed indirect regulatory scheme which places the regulatory focus on market participants. This Part will also explain how pension funds fit into an indirect framework and then offer an international solution to the task of uniformly regulating hedge fund creditors. This Comment will continue by analyzing the disclosures needed by market participants and how these disclosures should be provided. Finally, this Comment will conclude by demonstrating that this proposal will not drive hedge funds out of the United States and will therefore provide a practical way of ensuring market discipline.