Although hedge funds dodged the bullet in June, when the U.S. Court of Appeals struck down the ruling that would have required hedge funds to register with the Securities and Exchange Commission, the midterm Democratic victory, coupled with the recent high-profile blowup of energy hedge fund Amaranth Advisors, has once again reenergized critics. Rep. Barney Frank (D-Mass.) is now chairman of the House Financial Services Committee, and given that he has already introduced a bill that would give the SEC the go-ahead to reinstate its hedge fund registration rule, many hedge fund managers worry–and rightly so–that their days of wriggling out of oversight may be coming to an end.

These fund managers argue that any oversight would be cumbersome and costly, but more importantly would foil the strategies upon which they have come to rely–many of which depend on a degree of covert activity. But not everyone–including some in the industry–agrees that regulation is all bad. Some, like hedge fund lobbyist Lisa McGreevy, who is executive vice president and COO for the Managed Funds Association in Washington D.C., see registration as the ticket to more pension fund assets since some funds have rules against playing in unregistered waters. "The real issue on the Hill is going to be making sure that members understand what's going on and what hedge funds are and what they are doing," says McGreevy, who notes that 80% of hedge funds are already registered. "I think Rep. Frank and Senator [Christopher] Dodd (D-Conn.) have voiced the desire to have oversight hearings. I'm not going to say that [hedge funds won't get pension money unless they register], but the fact is a lot of pension funds will only invest in hedge funds that are registered."

Of course, if hedge funds fight too hard, a Democratic Congress could end up passing bills banning pension funds from investing in hedge funds entirely. "There will be a lot of discussion on whether hedge funds are an appropriate vehicle," adds McGreevy. Pension funds have a fiduciary responsibility to participants, she notes, and the onus will be on them to prove they're conducting adequate due diligence.