AllAboutAlpha.com notes an interesting study--by Michael King of the Bank for International Settlements and Philipp Maier of the Bank of Canada--that suggests the best way to regulate hedge funds is by regulating prime brokers. Recently, the large prime brokers--Morgan Stanley and Goldman Sachs remain the top two-- dictated much of what went on in the industry. So by imposing on prime brokers some strict collateral and risk management, regulators could corral the excesses of the industry. AllAboutAlpha.com understandably wonders if this amounts to the fox guarding the hen house, but the fact remains that directly regulating hedge funds may be a non-starter. The government has failed even in its attempt to require registration. True, the government has more leverage in the post-meltdown era. And the prime brokers are basically part of commercial banks, so the moment maybe propitious for novel arrangements.

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- here's the article

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