Funds Hub

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.

A kick up the…

It seems the UK Treasury Select Committee’s very public chastisement of the hedge fund industry in January has had some effect.

At the time, MPs zeroed in on the Hedge Fund Standards Board (HFSB) in particular and the relatively small number of funds it had signed up — 33 in December — even though these funds accounted for half of the European industry.

“You’ve attracted 20 fresh members in a year. If I was a trade union officer on recruitment I’d be sacked,” quipped Committee member George Mudie at the time.

However, things have moved on and firms have been — if not rushing — at least moving slightly more speedily to sign up.

With regulation at a European and international level looming, hedge funds are increasingly aware of the need to be seen to be imposing best practice standards.

Last week the HFSB said 13 more funds, including Odey, TCI and Jupiter, had signed up.

And yesterday HFSB chairman Antonio Borges told me the body is targetting 100 funds by the end of the year.

Blowin’ in the wind

The timing of the Alternative Investment Management Association’s hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.

Coming just a day after ECB President Jean-Claude Trichet called the credit crisis “a loud and clear call” for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.

The move, which will include regular — probably quarterly – disclosure of systemically significant holdings and risk exposure to national regulators, goes further than that suggested at last month’s Treasury Select Committee by Marshall Wace chairman and Hedge Fund Standards Board trustee Paul Marshall, who had proposed aggregating data through prime brokers.

“The international agenda is starting to gallop away… We can see which way the wind is blowing and we want to exercise leadership,” said AIMA CEO Andrew Baker, adding the proposals had been in the pipeline since early in the new year.

But AIMA’s drive to do this also serves to highlight the low number of funds that have signed up to the HFSB’s voluntary code – a fact seized upon by last month’s Treasury Select Committee.

AIMA is proposing unifying all the industry standards — AIMA, the HFSB, IOSCO, PWG and MFA — into one code. Their fear is that regulators may do this for them.