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Abstract

Recent news about hedge funds' successes and failures, and in some cases outright fraud, has increased the public's interest in a field that often prefers to cloak itself in a hidden veil. One can analogize hedge fund managers and the hedge fund industry to the nostalgic era of cowboys and the wild frontier. Hedge fund managers, like cowboys of the old days, do not want to be regulated. Just as the cowboys entering the frontier appreciated the lack of law or authority over their actions, today's hedge fund managers appreciate the lack of law or authority over their actions. And just as the frontier's significance to our nation grew requiring sheriffs and marshals to protect the new settlers from the wild cowboys, investors and the financial markets require protection from these modern day cowboys. Of course, just as the cowboys tried to fight the imposition of law and authority by arguing that they did not need policing because they are able to police themselves, hedge fund managers have advocated that regulation is unnecessary because they are able to self-police. In our modern frontier, while some hedge funds undoubtedly have helped make our financial markets more efficient, other hedge funds may have hurt investors and the financial markets through investor fraud, market manipulation, and additional market failure risk. The negative effects of hedge funds have persisted largely because hedge funds have remained lightly regulated. Investors and the financial markets need and desire some protection. More importantly, the recent rapid growth in the size and scope of hedge funds has made them the biggest players in the global financial markets. As a result of this rapid growth, unregulated hedge fund activity poses an ever-increasing threat to the very stability of the global financial markets.

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