So, how should the hedge fund industry react to the new hedge fund rules proposed by the SEC? Recall that the SEC already tried to impose a registration rule on hedge funds but was taken to court by Philip Goldstein of the hedge fund Bulldog Investors. The case went all the way to the Supreme Court, which sided with the industry.

As we've noted before, some hedge funds ended up registering voluntarily. This time around, we may see a court challenge emerge, but the outcome could be different given that Dodd-Frank spells out what the SEC is obligated to do in terms of regulation.

Another route for hedge funds would be to accept the rules--which will not take effect until after a comment period passes--and view them as an opportunity. Subjecting to period inspections and disclosing detailed information about operations-- about auditors, prime brokers, custodians, administrators and the like--actually dovetails with the current trend toward better compliance and more third-party administration.

The bar is higher in the sense that limited partners wants assurance. So, if hedge funds comply well with the new registration rules, this could be seen as a major positive, a marketable point. It might just help funds win clients. My sense is that the largest hedge funds will be willing to invest--in compliance officers, software and such--to pursue this course. It would be a wise move.

For more:
- here's a look at the proposed rules from MarketWatch

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