Mr. Chairman, thank you for holding this important hearing. Chairman Donaldson, I thank you for joining us today, and let me commend you for what has been, by all accounts, a successful early tenure at SEC.
The hedge fund industry has changed dramatically since A.W. Jones created the first hedge fund in 1949. Originally created by Jones as an alternative investment strategy, hedge funds today represent a $600 billion industry that employs a wide variety of complex and often risky investment strategies. When one considers the use of leveraging and derivative instruments, the actual impact of hedge funds on our financial markets and on underlying commodities is potentially huge.
In recent years, the importance of hedge funds has grown substantially as a much broader range of investors have sought out these funds, largely because their average returns have exceeded those of the S&P, the Dow and the Nasdaq.
Once the exclusive domain of wealthy, and presumed highly sophisticated investors, today's hedge fund investors include teachers, firefighters, nurses and retirees, as well as public and private pensions funds, universities and endowment funds.
Yet while hedge funds promise higher returns, the pursuit of those rewards also comes with increased risks. As hedge funds have grown, so too have hedge fund closures. In addition, we have seen an increase in hedge fund fraud.
The retailization of hedge funds and the increasing impact of hedge funds on our financial markets make it important that we carefully examine this industry and the many public policy issues at stake.
The SEC has begun such an examination, and I commend Chairman Donaldson for his interest in this matter. This Committee also has an important responsibility to address these issues, and I commend you, Senator Shelby, for holding this hearing.
We need to consider a host of issues, as my chart summarizes.
What does the growth of the hedge fund industry mean for investors and financial markets? Do those who invest in these funds have sufficient information to evaluate their risks? What challenges do the practices of hedge funds and fund managers pose to those charged with ensuring the integrity of our markets?
And, five years after the collapse of Long-Term Capital Management, what has been learned - and, more importantly, done - to mitigate the systemic risks posed by these funds?
It's my sense that the current system of hedge fund regulation is inadequate given the rapid change this industry has undergone. Some improvements may be able to occur through administrative action. Others, however, may well require legislation. Hopefully, the report that comes out of the SEC investigation will shed light on the areas of most urgent need.
Chairman Donaldson and Chairman Shelby, I am committed to working with both of you to ensure that the SEC has the tools it needs to protect investors and our financial markets, while promoting the continued growth of this industry.
I look forward to today's testimony, and again thank you, Chairman Donaldson, for joining us.