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In association with Hedge Fund Intelligence |
Similar to the hearings held in the US Congress late last year, the Treasury select committee in the UK House of Commons has been holding hearings recently to investigate the financial crisis – including a session on hedge funds. Such an engagement with the democratic process should provide an ideal opportunity for hedge fund industry leaders to get across some important truths – and assist lawmakers in crafting appropriate legislative responses.
As in Washington, where the session featured luminaries such as George Soros and John Paulson, the London-based industry was represented by heavy hitters, including Paul Marshall, co-founder of Marshall Wace Asset Management; Chris Hohn of The Children’s Investment Fund; Doug Shaw, formerly of Gartmore and TCI and now head of hedge funds at BlackRock; and Stephen Zimmerman of NewSmith Asset Management.
After sitting through the session, however, I left the hearing room feeling somewhat frustrated and dispirited. The hedge fund industry group, also including AIMA director Andrew Baker, had been well prepared for the grilling they would get – and made a lot of good points. But the committee, judging by the summing up of chairman John McFall, seemed determined not to hear them – or to hear selectively only the points they wanted to take on board.
Shaw noted that hedge funds managed from the UK are already subject to significant regulatory requirements – unlike in the US, where it is still possible not to register. The industry in London had grown substantially in recent years and without any frauds or other scandals, certainly nothing like the Madoff affair in the US.
Baker noted that the UK industry directly employed about 40,000 people, a number derived largely from an analysis of the EuroHedge and InvestHedge databases. It should have been implicit that these are of course generally well-paying jobs that make a significant contribution to the UK economy – and to the tax revenue of Her Majesty’s Government.
Marshall argued that hedge funds had only a minor role, if any at all, in the present economic crisis – given that banks had hardly got themselves into trouble lending to hedge funds. To blame the crisis on hedge funds, he said memorably, would be “like blaming the passengers in a bus crash”.
Committee members, however, were clearly sceptical and this became apparent when McFall raised the issue of what had been done in terms of self-regulatory efforts on voluntary standards of practice. Baker and Marshall outlined the creation of the Hedge Fund Standards Board. But McFall and other members of the committee were unimpressed by the fact that only 34 management firms had joined at the time (the number has since increased) out of more than 400 firms that run hedge funds in London.
Marshall made the point that the first 34 signatories were all bigger firms and accounted for more than 50% of the industry’s assets but this was somehow quickly forgotten – hence the accusation that the industry had failed to put its own house in order took hold among committee members.
Likewise, the point that hedge fund managers were not in front of the committee to plead for financial assistance – unlike, say, bankers or auto makers – also seemed to get glossed over in the exchanges.
Shorting
Committee members were particularly keen to probe short-selling, and especially of financial stocks. Both Marshall and Shaw tried valiantly again, apparently in vain, to point out that hedge funds are extremely active on the long side too (and typically more so than in shorting) – hence that recent profits on short positions should not be viewed in isolation; and that restrictions on short-selling have deleterious effects all round.
Strangely, the one area in which I felt the industry might have been most vulnerable to attack – activism – did not come up until the very end. TCI, for instance, had been seen as a major influence on the sale of ABN Amro, which has of course had such devastating consequences for Royal Bank of Scotland – bailed out by UK taxpayers to the tune of £20 billion. I expected Hohn to get some tough questions on this, but for most of the hearing he sat impassively and was not questioned directly.
Hohn, who has at times adopted a very activist stance to promote corporate governance and responsiveness to shareholders, could no doubt have mounted a robust defence of TCI’s actions – if he had been pushed on this. But he was merely required to note that in the ABN Amro situation good value had been realized for the shareholders. As the committee member noted in response, it is of course UK taxpayers that have ultimately picked up the tab. “Pray for us!” was the member’s closing comment.
It is a convoluted argument, but activism is of course a relatively uncommon strategy – not something that many hedge fund managers would necessarily defend.
Disappointed as I was with how the hearing went, whether it results in damaging or counterproductive regulatory measures remains to be seen. One veteran PR executive, who used to work at Westminster and now represents some top UK hedge funds, told me afterwards: “When you get as far as a committee hearing like this, it really means you’ve already lost the argument. You are only there for a ritual kicking – to let some MPs show off in front of the cameras.”
But all is not lost, he also told me. While committee members might want to sound tough in front of the cameras, a lot of the important evidence is given in writing – and the hard yards of negotiation are done behind the scenes. I have my fingers crossed that MPs will not set about dismantling or destroying what is still – even after all the recent turbulence – one of the most vibrant, creative and successful industries to emerge in the UK recently.
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In association with Hedge Fund Intelligence |
