By Niki Natarajan
The tale begins on Christmas Eve, eleven years after the death of Long Term Capital Management. The ghost of LTCM appears before hedge funds and investors to warn them that pensioners will be bearing heavy chains for eternity if they do not change their greedy ways.
LTCM also predicts that three Christmas ghosts will visit the hedge fund industry during the course of the night, fulfilling LTCM's prophecy.
The first, the ghost of hedge fund Past, takes the industry to 16 September 1992 - to the scenes of George Soros making $1 billion in profits by shorting sterling and forcing the pound to exit the Exchange Rate Mechanism. Hedge funds hit the headlines and set the scene for hatred and envy.
The second spirit, the ghost of hedge fund Present, takes the industry to the home of the EU in Brussels to observe the political game of 'who can crush hedge funds first?'. The ghost also takes them to the humble dwellings of pensioners the world over, to observe the Christmas dinners of the impoverished workers whose pensions were decimated because they could not use hedge funds properly to protect their savings.
The third spirit, the ghost of hedge funds Yet to Come, harrow the managers and investors with dire visions of the future if they do not learn and act upon what they have witnessed.
The third ghost says the EU reforms will be akin to Delilah cutting off Samson's hair and his subsequent loss of power. Regulating the industry is one thing, but taking away all the powers of the hedge fund managers will destroy the taxes generated by them.
Like Samson's hair, the hedge fund talent will grow back. But, it will, once again, shy away from the mainstream and continue to harness the money-making power of the brains it attracts. If hedge funds are forced, again, into an illicit hidden world, the frauds will follow and flourish like mould in the dark, damp, unregulated corners of the market.
The third ghost advocates harnessing the power of hedge funds as part of the asset management industry, so that pension fund investors are able to build portfolios based on realistic liquidity profiles and pick and mix hedge fund strategies according to their needs rather than what is deemed acceptable.
The ghost of hedge funds Yet to Come urges the industry to follow in the footsteps of FSA's Dan Waters and Wellcome Trust's chief investment officer Danny Truell to encourage the regulators to draft the EU Directive with greater understanding about the use, purpose and appropriate regulation of hedge funds.
The tiny $1.5 trillion dollar industry does not die. Regulations and other control measures are enhanced to deter fraudsters but allow alpha to thrive in the open.
Investors will start to take care of their pennies and sweep the cash into return-generating vehicles. A new generation of funds of funds will emerge, such as the Frey Quantitative Strategies fund and the new FRM Principia business, that will listen to the investors' requests on fees, liquidity and transparency, without cutting off the performance power that made hedge funds attractive in the first place.
Meanwhile, hedge fund charity groups such as ARK, Robin Hood Foundation, Hedge Funds Care and 100 Women in Hedge Funds will follow in the footsteps of Soros and Renaissance Technology Corporation's Jim Simons and continue to donate millions of dollars to philanthropic causes and gain the reputation as an industry that embodies the spirit of Christmas.