Funds Hub

Money managers under the microscope

Reuters Fund Summit: Will hedge fund regulation open the door to retail investors?

March 17, 2009


By Huw Jones


Hedge funds are nothing if not optimistic – they have to be in the current climate.



rtxcvygWhile holed up in an English country resort last weekend, finance ministers and central bankers from the G20 group of countries agreed that the $1.4 trillion hedge funds sector should be made to register, be directly supervised and provide information about their holdings to regulators who track risk in markets.


And the European Commission, which drafts financial rules applied across the European Union, said later it will come forward with a draft law on April 21 for the sector.


The industry has long expected more regulation and is already beavering away in the background to come up with globally agreed standards in a bid to avoid aggressive regulation.


The sector’s golden bubble has burst and it remains an easy whipping boy for many politicians, a useful way of deflecting public attention from some of their own failings in the crisis. Short-selling curbs aimed at hedge funds are still in place in some countries though bank shares are still under the gun.


But could regulation help make the sector more respectable and allow it to finally attract a wider range of investors even at the cost of a big bundle of red tape?


Ken Kinsey Quick, head of multi-manager at Thames River Capital, seems to think so.


“I really think hedge funds should be regulated. Bring it on,” Quick told the Reuters Fund Summit currently underway in Luxembourg. “People have not been able to have access to hedge funds. I wish they would just regulate it and bring us all out into the open,” Quick said.


Hedge funds have long wanted to be able to tap the huge retail investment market, miffed that plain vanilla mutual funds can chalk up eye watering falls in asset values but are still touted as the perfect pension savings vehicle for the public.


But it will take more than direct supervision and registration for hedge funds for regulators to allow all investors to tap them.


Even if “transparency has gone through the roof” as Quick puts it, more regulation will bump up compliance costs and likely help split the industry into two parts — a mainstream section that may eventually get widespread regulatory blessing to offer retail investors products within the EU UCITS framework, and a more cutting edge, innovative offshore sector that remains out of bounds to Main Street.


But this is all academic for many hedge funds as they won’t survive to apply regulatory changes. Hedge funds lost 19 percent last year with investors pulling out a record $158.91 billion in 2008, according to data from Lipper.


Quick believes banks will end up being plain utilities, opening the door to another golden era for hedge funds and also thinks half of all hedge funds could close down in a shake out he expects will be done and dusted by June. Now that may be really optimistic.


Mid to small cap funds are becoming increasingly reliant on funding coming from non-institutional investors. What are some of the most effective unconventional capital introduction strategies employed by managers today?


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