The Law and Economics of Hedge Fund Regulation: A Comparison Between the U.S. and the EU

Abstract

The history of economic regulation is as long as the history of civilization itself. Historians’ reports are replete with clashes between private enterprises and public intervention leading to pendulum swings of economic policies between private and free enterprises and centrallyplanned economies. The triggering events for reversing the direction of the pendulum have usually been failures of markets or governments culminating in an economic or financial crisis. Indeed, it is an omnipresent feature of financial regulation that new regulations, though desperately needed, are not introduced until a dramatic event occurs. The procyclical nature of financial regulation is partly to be blamed for this particular attribute of government intervention. During periods of economic boom in which regulation is needed the most, building a political coalition for stricter regulation is hard to come by. Public reaction to regulations running counter to the demands of booming markets which enlarge the size of the economic pie will make regulators reluctant to “take away the punch-bowl, just when the party gets going”. In other words, “introducing regulation during a boom is like fighting a preemptive war—there is very little political reward for it.”