For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of over $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super-rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
So, what are we looking at, here? A sophisticated group of investors, working with hedge funds can dump millions of dollars into a hedge fund and manipulate the snot out of particular markets by the sheer volume of their trading. This creates the potential for vast wealth on their part, but, insofar as energy and commodities are concerned, it also creates the potential for increased food, fuel and energy supplies.
In fact, the proponents of ethanol say the rise in the price of corn and corn-based products, including food and corn sweeteners, is more the fault of commodities traders than the increased demand on the corn supply created by the gasohol industry. Nevertheless, whether the price increase comes from increased demand on the supply of corn, or from increased trading and price manipulation in futures and hedge funds, the result is higher food, fuel and energy prices for the consumer.
And, while government agencies are on the look out for alleged manipulation, prices are skyrocketing out of control. This, even with intense scrutiny from regulators and outrage from consumers.
According to Senate testimony, government agencies continue to monitor the market, looking for undue influence and price manipulation. A representative of a regulatory agency testified that:
"the Commission's surveillance staff closely monitor the futures and option market activity of all traders whose positions are large enough to potentially impact the orderly operation of a market."
(ibid)
The government's surveillance on the markets may lead to punitive procedures against traders who are found to be manipulating prices. According to the testimony before Congress:
If any indications of attempted manipulation are found, the Commission's Enforcement Division investigates and prosecutes alleged violations of the CEA and Commission regulations. Subject to such actions are all individuals that are (or should be) registered with the Commission, those who engage in trading on any domestic exchange, and those who improperly market commodity futures or option contracts. (ibid)
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