Money managers under the microscope
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.”
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.
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.