|In association with Hedge Fund Intelligence|
Its certainly not the end of the matter its probably only the end of the beginning. More registration, reporting and oversight requirements imposed on hedge funds now seem inevitable. Yet, following the recent G20 Summit in London, it does at least seem that these new requirements are likely to be more sensible, proportionate and appropriate maybe even beneficial to the long-term health of the industry and not the kind of drastic, sweeping over-reaction many had feared.
The devil, of course, is still in the details. But it does seem that the restrictions on hedge funds called for ahead of the G20 by world leaders such as president Nicolas Sarkozy of France and chancellor Angela Merkel of Germany have been averted, at least for now. Quite what those restrictions would have amounted to is far from clear. But in a febrile political atmosphere, with public opinion inflamed by the scale of the global financial crisis and the perceived stupidity and avarice of bankers some unpleasant outcomes were distinctly possible.
"Last year was the worst year
In the event, it seems that the Alternative Investment Management Association the international trade body for hedge funds ultimately proved up to the task of getting the G20 to steer in the right direction. Aima, criticized by some in the past for not being able to give the industry a clear and powerful voice, seems to have responded to the lurking dangers just in the nick of time. Led by chief executive Andrew Baker and new chairman Todd Groome, who was until recently at the IMF, Aima marshalled its arguments in a way that worked for the big London conference.
Viewed from the outside, its not hard to see why hedge fund managers and errant bankers have tended to get tarred with the same brush in the public mind. Many hedge fund people have come out of the investment banking world, and the relationship through execution, clearing, prime brokerage and so on has been symbiotic, at least to some extent. For the public, therefore, its only a small jump to conclude that hedge funds, like bankers, have simply found clever (covert and illicit) ways of making themselves rich, in return for delivering little or nothing of value to the economy.
There have of course been rather too many hedge fund managers who have raked in huge fees for performance only for their investors to lose those previous gains and more in the treacherous markets of the past year. Plus there have been plenty more managers who caused further anger by imposing gate provisions locking investors in (while continuing to take management fees). Shame on them except for those (and there are plenty) genuinely attempting to make back their investors losses.
However, it is a very big step from there to conclude that hedge funds were somehow centrally to blame for the global crisis. Hedge funds as a bloc deploying leverage might have exacerbated the bubble in credit instruments and certain other assets. And there might be some substantive continuing problems with fraud affecting the industry such as demonstrated most spectacularly in the Madoff case. But it is clear that the banks did not make huge losses by lending to hedge funds.
As Aima was able to argue, rightly and effectively, the hedge fund industrys role in the current economic crisis has been marginal. Aimas statement welcoming the G20 communiqué added: "Last year was the worst year on record for the worlds hedge fund industry and of course our members want stability returned to the global economy as much as everyone else."
The G20 proposals on hedge funds for enhanced oversight of funds that are "systemically significant" do not appear to require much from the industry. The vast majority of hedge funds are of course much smaller than banks, and also use much less leverage. Only a relatively small number of large hedge funds appear likely to be under surveillance by those criteria though it remains to be seen how far the regulators decide to cast the net.
G20s proposals on so-called tax-haven domiciles also seem comparatively mild at this stage. While there was a longish grey list of domiciles needing to take further actions to comply with the standards of the big economies, there were only four places on the initial blacklist none of which was used much if at all by hedge funds, and all of them responding quickly to say they too would comply.
That said, it seems likely that big hedge fund groups will seek to do more anyway in onshore products and structures such as funds compliant with Ucits III rules in the European Union as some big European groups such as BlueCrest and Brevan Howard have already been doing. A hedge fund industry that emerges from this crisis bigger, stronger, more transparent, more regulated and more onshore does not seem to be such a bad thing.
|In association with Hedge Fund Intelligence|