- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of "Verdict on the Crash" published by the Institute of Economic Affairs. The opinions expressed are his own. -

We could see it coming, couldn't we? Those gigantic over-leveraged hedge funds were bound to come crashing down, as their massive bets turned sour, forcing them to default on their bank loans and bringing the banking system to its knees.

Except that it never happened. Instead, the system was destroyed by the greed and incompetence of the insiders, including some of the most blue-blooded investment and commercial banks in the world. Highly regulated as they were said to be, they were allowed in every country except Spain simply to move their riskiest investments off balance sheet, where they were free to bet the bank on investments in the notoriously toxic mortgage-backed securities.

Note the absence of hedge funds and private equity - Alternative Investment Funds or AIF’s - from this story.

Nonetheless, with proposals to impose new reporting requirements and controls on management, the EU is concentrating its regulatory fire on the dog that didn’t bark, with the clear intention of reducing the competitiveness of AIF’s and tying the hands of their managers (with a side swipe at the offshore financial centres where many are legally domiciled).

Since the only investors in this type of fund are high net worth individuals and institutions like pension funds, insurance companies and mutual funds who ought to be capable of looking after their own interests, official concern can only be justified if there is a potential threat to the banking system – something which you might have thought would have been best left to the banks to monitor. The fact that the EU feels the need to make these proposals amounts to a vote of no confidence in bank managements.

Now confidence in bankers may, understandably, be as low these days as in MPs. But are there any better grounds for trusting regulators who allowed the crisis to occur under their very noses? If regulators have indeed now learned the lessons of the crisis, should they not concentrate on applying them to the banks in their charge?

Ironically, hedge funds do remain problematic. First, pre-crisis academic research had already shown hedge fund managers to be incapable on average of earning high enough returns, even in a bull market, to justify their high fees. The crisis offered them a golden opportunity – which they have mostly missed - to show that they could make good on their promise to shield investors from losses in a bear market.

Second, AIF’s should carry some of the blame for the crisis, but their sin was one of omission, not commission. As major players, they could have done far more to rein in empire-building bank managements. For example, instead of short selling RBS to prevent its catastrophic purchase of ABN AMRO, they sold too little and too late – when RBS was already beyond recall. Moreover, they could have used their voting power far earlier to insist on remuneration packages for executives that were properly aligned with shareholders’ interests. Instead, by their inaction they endorsed management decisions either explicitly or by default.

But then this last is an accusation which could have been directed at any of the traditional investment vehicles – mutual funds, insurance companies, pension funds etc – though this fact is apparently of no concern to EU Commissioners, fixated as they are on their vendetta against the “locusts".

– James Saft is a Reuters columnist. The opinions expressed are his own –

While they have avoided the opprobrium heaped on bankers during the bear market, traditional active fund managers have quietly been proving that they too are often highly paid destroyers of value.

Active managers have few bushes left to hide behind, and the release of a new report from Standard & Poor’s uproots one of the few left: that somehow they provide protection during down markets, being able to go into cash and defensive stocks.

Check out the study for the gory details but the takeaway is that across styles and markets the majority of active fund managers, often the vast majority, simply can’t manage money well enough to make up for their own costs and the costs of all of those trades.

Over the five year market cycle 2004-2008, the S&P 500 outperformed 71.9 percent of actively managed large cap funds and most active funds in each of the nine U.S. domestic equity style boxes were outperformed by indices during the disaster of 2008.

At least casinos offer free drinks and valet parking.

Beyond tighter regulation and controls on leverage, a good outcome from the current morass would be a fundamental re-think by holders of capital about what exactly it is they are paying for from investment managers. Diversification? Not really, with so many closet index funds out there.

And spare me the argument that active managers earn their keep by holding company management’s feet to the fire. With precious few exceptions, this simply is not happening and arguably is a common good which individual investors are unwilling to pay for.

Most individual investors would likely be better off paying an annual fee for an asset allocation check-up and simply putting the advice to use via ETFs or index funds.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –