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Money managers under the microscope

Hedge funds hit back after ESMT report

June 1, 2010

As EU countries and the European Parliament thrash out final details of the AIFM Directive on hedge funds, particularly over the treatment of foreign fund managers, two reports lend firepower to those calling for a tougher line to be taken.

In its latest Financial Stability Review, the ECB says the financial crisis showed there are problems associated with hedge funds’ business models and they can add to market stress during volatile periods.

And a report from the European School of Management and Technology raises “disturbing questions” about investors’ willingness to chase performance actively at all costs, regardless of risk.

The claim is that investors back investment styles that have done well over the past three quarters (even though the volatility of hedge fund styles means top-performers can often underperform subsequently), leading to the danger that momentum investment takes hold, pushing up the price of “overheated” securities.

“As a result, the authors of the research take the view that great regulation is necessary to protect investors and that the provisions of the controversial AIFM (Directive) ought to be welcomed”, it says.

Hedge fund industry body AIMA hit back today.

“The authors of this report make a number of elementary errors — they suggest hedge fund managers are not regulated, for example — and their findings could apply to any branch of investment management or asset class, not just hedge funds. The report is surprisingly disparaging about institutional investors, who in fact devote considerable time and resources to often very complex and lengthy due diligence processes with hedge funds that encompass much more than performance returns.

“The authors imply that regulation should be solely about investor protection, when its bigger aim should be about reducing systemic risk – in the case of our industry this means hedge fund manager authorisation and systemic risk reporting, measures that the industry supports. And the report contradicts the findings of weightier investigations into the financial crisis and systemic risk, such as those by Jacques de Larosière, Lord Turner and the FSA, which identified no material contribution to systemic risk from hedge funds.”


No industry will regulate its self efectivley.

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