Time to regulate hedge funds

Hedge funds escaped regulation by arguing that their problems would only affect their sophisticated investors. But this argument has as many holes in it as a slice of Swiss cheese.That's because banks lend money to hedge funds – I've seen as high as $3 per dollar of assets. And also because hedge funds buy stocks as do individual investors.

What difference does this make to small investors?

• When banks can't get their money back from the hedge funds, they write off the bad loans. Individual investors in bank stocks suffer as their prices decline.
• When banks lose money on hedge fund loans, they tighten lending terms to all their borrowers. Individual investors seeking a mortgage or car loan end up paying more.
• Hedge funds scrambling to meet banks' demands to pay back their loans will sell the liquid parts of their portfolios -- namely stocks -- to raise cash. This will hurt individual investors who happen to own these stocks.

My recommendation to the government would be to require hedge funds to disclose their holdings every day, the amount they're borrowing, and who is doing the lending.This information would enable individual investors to protect themselves from hedge funds' mistakes.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.