How should we regulate private equity and hedge funds?

This paper discusses the activities of hedge funds and private equity funds. We consider the rationale used by proponents for introducing new regulation for hedge funds and private equity. There is a division of opinion regarding whether this alternative asset sector should be subject to new regulation. The competing views are assessed critically. We conclude that more economic evidence is required before new legislation can be introduced. We also focus on the effects of the partial convergence of hedge funds and private equity funds. Clearly the differences in the contractual structure of hedge funds and private equity vehicles indicate that parties are capable of structuring their particular ownership and investment of their instruments without having to satisfy burdensome regulatory requisites. Moreover, even though both private equity and hedge funds are typically organized as limited partnerships, there remain a number of contractual provisions that differentiate the two main alternative investment fund strategies. In this regard, we examine the terms and conditions of fund formation and operation, management fees and expenses, profi t sharing and distributions, and corporate governance of the respective fund structures. On balance, our analysis shows that the contractual basis for each fund type is usually adequate to address the agency problems that abound in this sector