Funds Hub

Socially useful?

Andrew Baker, boss of hedge fund industry lobbyists AIMA, has taken umbrage at the “unsavoury terms” used to refer to his members.

He doesn’t like the biblical monikers of locusts or parasites and gets very prickly indeed at accusations the Mayfair money men might be socially useless.

Not fair, says Baker, and if you want to argue, he’ll set his big, new, socially-useful, mates on you.

He says the hedge fund industry these days is as much about sensibly managing money for the giant pension funds (oh.. and let’s not forget charities and universities) as it is about speculating with the spare cash of the ultra-wealthy.

“Investment by pension funds in hedge funds could mean a more secure or even a bigger pension for you when you retire and lower pension contributions for you while you are still working. Investment by university endowments and charities in hedge funds could mean more resources for them to devote to university education and charitable activities, and less risk of market-related losses.”

So hedge funds are basically just giving money to charity, see?

Well Baker doesn’t quite go that far… and it is a fair enough point at its heart which comes alongside some well-worn arguments about the provision of liquidity and spreading of risk.  You can read his full note below.

Hedge funds hit back after ESMT report

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.

Morning Line-Up: AIFM, Jupiter, housing

Hedge fund directive strikes blow at City - Times

Funds take on university housing challenge – Financial Times

Jupiter dream team spurn Europe – Fund Strategy

AIMA expresses concerns about dual registration issue in U.S. – HedgeWeek

Gabbert spots side letters loophole

Earlier this month we reported that the Hedge Fund Standards Board had voiced its concerns over the increased use of so-called “side letters” — preferential deals offered to some clients that could disadvantage others.

These ad-hoc deals are covered by best practice guidelines, although not formal rules, that were issued by AIMA in conjunction with the FSA. These say that managers should disclose terms that give some investors better access to their cash, although it seems that these guidelines may not always be followed to the letter by managers.

However, eagle-eyed lawyer Dale Gabbert of Reed Smith has spotted a potential loophole, which is particularly relevant now that many big hedge fund firms are opening offices in Switzerland or elsewhere and shifting the location of some functions such as fund management to cut their personal or corporate tax bills.

He explains: “One of the unintended side effects of firms moving their asset management function from London to reduce their tax burden will be that the AIMA guidance on Side Letters will no longer apply to them.

“(This is) either because they are no longer authorised in London at all or because the London operation is limited to marketing, trade execution or investment advice.”

A small technicality, but as has been shown during the credit crisis, these are often what matters in the hedge fund world.

HFSB sees risk in leverage rules

There’s no shortage of resentment in London against the EU’s planned directive on hedge funds, but the Hedge Fund Standards Board on Monday said the rules could actually create one of the problems they’re set up to avoid.

At a CSFI debate at the beautiful Innholder’s Hall in the City, HFSB executive director Thomas Deinet pointed out that, as seen all too often in the credit crisis, in falling markets a fund’s leverage automatically rises.

Imposing leverage limits could mean funds breach these levels, forcing them to sell assets to reduce borrowing and exacerbating the market problem, hence exacerbating systemic risk.

“There’s a systemic concern,” he said. “A lot of managers will be hit by leverage limits and will be forced to sell, which is when you want people to hold onto assets.”

However, there seems a growing consensus that the draft will be watered down. Both the HFSB and AIMA think a “moderately satisfactory” (in the words of AIMA CEO Andrew Baker) compromise is achievable.

And at a Katten Muchin Rosenman Cornish breakfast briefing today (this time at the Capital Clubin the City), Martin Cornish said areas of the rules covering valuators and capital requirements could be eased.

However, given that U.S. proposals could cover managers with $25 million or more in assets, he sees scope for the directive to be exteneded to cover much smaller funds.

AIMA claims “broad consensus” on EU hedge fund directive

For UK-based opponents of the controversial EU hedge fund directive, there are signs the draft could be overhauled.

Hedge fund industry body AIMA said today “there is now a broad consensus among European policymakers that the directive does need a lot of work and that there will be significant revisions”.

The group has been campaigning vigorously against the draft law, which proposes controls on leverage, which service providers can be used and where funds can be sold, and says it should instead focus on three areas — registration and authorisation, reporting of systemically-relevant data and a workable passport.

Given UK-based hedge fund managers are already regulated by the FSA and AIMA has already put forward proposals on reporting hedge fund positions to regulators, this would be a much-watered down version of the directive.

Meanwhile, Ken Clarke, shadow business secretary for the UK opposition Conservative party, told The Times he didn’t think hedge fund managers were genuinely concerned about the proposed new rules as they would be diluted through ordinary negotiations, although AIMA said “to declare an early victory is very premature”.

Nevertheless, there is a marked change of tone in the UK. The next step will be to see if that change is reflected when supporters of the Directive such as Poul Nyrup Rasmussen next lay out their position.

(See also NAPF takes aim at EU AIFM draft and Onshoring the hedge fund industry)

Morning line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Hedge funds still aren’t reducing their fees – WSJ

Hedge fund firm Brevan Howard to open Swiss office – Reuters

Hedge funds jittery about registration – WSJ

Changing demographics look to alternative market- FTAdviser

Hedge funds are winners from recession- Democrat and Chronicle

A walk in the park

Hedge fund industry group AIMA today gave a relatively warm welcome to IOSCO’s regulatory plans.

After draft laws from the European Commission, which have been attacked by almost the entire UK hedge fund industry, IOSCO‘s proposals — including registration of managers, disclosure of systemically-important information to regulators, registration and supervision of prime brokers — must seem like a walk in the park.

IOSCO’s principles follow the G20 pledge in April to regulate the hedge fund industry. While hedge funds did not cause the credit crisis, the group says, they may have amplified its effects.

However, with so much regulation being put forward at present, AIMA is being very careful to point out any potential problems.

“We are concerned that these recommendations may lead regulators to seek quantity rather than quality of data,” the group says.

With regulators having been caught short in cases such as Madoff and Northern Rock during the credit crisis, merely collecting piles of information is of little use if it is not examined and acted upon in the right way.

Do you know where you’re going to?

It is still a moot point whether institutional investors are putting more money into hedge funds or taking money out.

Yesterday Antonio Borges, chairman of the Hedge Fund Standards Board, told Reuters that there had been a “dramatic reversal” since December and that institutions were “returning to the hedge fund industry in a very serious, well thought-through process”.

However, a Reuters poll published today of 10 UK investment firms showed that on average they reduced allocations to alternative assets in March.

The two results are not necessarily contradictory, but do show that the very recent actions by investors towards hedge funds, which delivered their worst ever performance last year, seem to be varied and hard to gauge.

Recent research from AIMA showed that institutions now own more than half of all hedge fund assets. Their future actions will be key to the industry’s future.

Turn! Turn! Turn!

For all the political noise about hedge fund regulation, today’s Turner review looks like a relatively easy set of rules for the industry to stomach.

In his 126-page document, mostly about the banking sector, FSA chairman Adair Turner says the watchdog will demand more information from hedge funds and says regulators should be able make rules in areas such as capital and liquidity if hedge funds start to pose systemic risks or become “bank-like” in their activities.

And while Turner points out hedge funds can pose systemic risks, he notes the FSA’s already-extensive regulation of hedge fund managers.

Significantly, he clearly draws a distinction between the activities of hedge funds and banks, pointing out that hedge funds have tended to be much less leveraged.

Hedge fund industry executives believe they can live with disclosing more information to regulators, which mirrors proposals put forward last month by AIMA, a hedge fund industry body. AIMA, the PWG and the MFA have also written to the Financial Stability Forum, committing to work together towards global standards.

Some leveraged credit strategies could see returns hit under the proposals, which could make them sit on extra cash, but this is relatively small proportion of the industry.

Next month will be key for hedge funds, as G20 leaders meet in London on April 2 and the European Union proposes binding rules on April 21. If the industry can escape with new disclosure obligations or with caps on prime broker borrowing — a suggestion made by many in the industry — then AIMA will be able to claim a major success in seizing the initiative in the hedge fund debate.