Funds Hub
Money managers under the microscope
LIPPER: Are ETFs in trouble?
By Detlef Glow, Head of EMEA Research at Thomson Reuters fund research firm Lipper. The views expressed are his own.
Exchange traded funds (ETFs) have found themselves under ever more scrutiny from regulators and market participants this year and expectations are that new rules for the sector are just a matter of time.
It’s tempting to think of ETFs as unwilling victims of new regulation, but to my mind, ETFs have much to gain.
The point is that it isn’t just regulators who are seeking improved transparency on fund holdings and on the use of derivatives by mutual funds, crucially it is end-investors too. And once the fog has cleared, they might come to see ETFs — with daily published portfolios and clearer statements on the use of derivatives in general — as a role model for all kinds of mutual funds.
The discussion surrounding ETFs could leave you with the feeling that they are unregulated products; that fund promoters can go wild when creating new products and with the use of derivatives in the portfolios. In reality though, ETFs follow the same local and/or international legislation of any other mutual fund; the EU UCITS regime for example.
So, why all the fuss around ETFs? In my opinion, there is nothing uniquely wrong with these products as they are using the same tools and techniques used by other funds under the UCITS regime. Some authorities, however, have raised questions as ETFs grow in popularity among professional investors. A deeper look into the questions posed shows that the points made by the critics are not only applicable to ETFs, but to any mutual fund.
CONCERN
Lipper: Fighting fragmentation
By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own.
The European investment funds industry has been reshaped over the last 25 years by EU directives designed to improve efficiency, strengthen competitiveness and boost distribution. However, the latest battle to reduce fragmentation of the industry is looking like a hard one to win.
The first UCITS (Undertakings for Collective Investment in Transferable Securities) directive was created in 1985 with the aim to lay the foundations for a single European retail market.
Faced with regulatory gaps and other flaws, it had only limited success and a second attempt was initiated in the early 1990s, only for that project to be aborted due to major disagreements between member states.
Thereafter, a real effort of coordination and communication by the member states allowed the UCITS III Directive to emerge in 2001, the implementation of which has been an important milestone in the history of the European investment funds industry.
We have witnessed the beginnings of a unified regulatory platform, enhanced protection for retail investors and an expanded range of products and strategies.
Nevertheless, the European fund market still suffers from fragmentation, which penalizes the performance delivered to investors. Relatively lower levels of assets under management make it difficult to benefit from economies of scale.
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.
Morning line-up: Asian solar, bonds and correlations
News and views on the fund industry from Reuters and elsewhere:
Lands of the rising sun – Reuters
Bonds. Bubble? – Telegraph
Chasing the dream – Reuters
Don’t take it personally.. – Belfast Telegraph
New bid to solve hedge fund rules row – Reuters
Correlation swaps.. – FT Alphaville
Morning line-up: USS, Gambhir and the US take on regulation
News and views on the fund industry from Reuters and elsewhere:
USS prepares for tough call – Reuters
Gambhir likes UK, Germany – CityWire
Wall Street still in the hedge fund game – Reuters
Market reprieve robbed clients of change – Reuters
Rasmussen gives the bankers both barrels
Poul Nyrup Rasmussen’s visits to London are always value for money, and today was no exception as the president of the party of European socialists launched into a tirade against banker bonuses.
“When I listen to you it’s like you’re living in another world,” he told an audience of financial executives and journalists at a Chatham House conference after a number of questions from the floor suggested EU plans for tighter regulation might be counter-productive.
“Have you heard about the recession? Do you know that we have lost 7 million jobs in Europe? Do you know that?
“Do you know that thanks to society you’re still sitting here. They are the ones who are bailing out the banks and you’re still insisting that you should have your bonuses on taxpayers’ money.
“Can you understand the seriousness of people’s anger? I don’t hear any indication of your understanding of that, and that’s a problem for you. Because if you don’t listen and if you don’t honestly go into a discussion on how to make real regulation but insist that you should not have regulation … that’s not a sustainable point.
“So in your own interests, can I give you good advice? Sit down at the table and start by recognizing that you have had a co-responsibility and a heavy one in the reasons behind the mess we are in right now… It is inevitable for me to say you are going to have regulation.”
Morning line-up
News and views on the hedge fund sector from Reuters and elsewhere:
Morgan Stanley to raise capital for hedge fund clients – Reuters
GLG Partners opens offices in Asia - Reuters
Cadbury deal to start debate on hedge funds’ role in takeovers – Times
US bank clamp-down rattle hedge funds – FT
Pension funds warn of €1.5 bln regulation cost
As the debate over the EU’s controversial and highly-politicized AIFM proposals on hedge funds and private equity rumbles on, there emerges more evidence that boosts opponents of the plans.
An article in Global Pensions highlights a letter to the European Parliament’s Committee on Economic and Monetary Affairs from Dutch pension funds and asset managers, saying the implementation of the AIFM in its current form could cost 1.5 bln euros annually.
The way this would happen, the letter argues, is that pension funds may change their asset allocation, switching out of all non-Ucits, non-EU assets to more traditional assets such as equities or fixed income.
There is potentially a large disparity in returns — 6.46 pct on equities and fixed income and 8.84 pct on non-EU, non-Ucits alternatives. When translated across pension funds’ assets, the loss in income is 1.47 bln euros.
To compensate, these pension funds say contributions would have to rise by at least 6 pct.
Critics of the directive, aware that sympathy among politicians and the general public for hedge fund managers is limited, have seized on warnings by pension funds as evidence that the AIFM proposals could hit the average man or woman on the street.
They are also likely to raise concerns that regulation could be forcing funds to change their investment decisions.
New blow for hedge fund lobby
The battle over how hedge funds will be regulated by the EU has been going on for some time now and has taken many twists and turns along the way.
However, after apparently making progress with the latest compromise text from Sweden, opponents of tough regulation may have hit a setback.
According to a report by Jean-Paul Gauzes, obtained by Reuters, the Frenchman has recommended tighter rules than many had expected.
These include funds having to tell regulators how much they intend to borrow, the creation of a pan-European watchdog that could intervene if a fund is seen to be taking too much risk, and the same pay curbs as for bankers.
The Gauzes report, which was due to be published this week and discussed by committee next week, was seen by many in the industry as an influential report from a level-headed policy maker who had previously worked in the financial services industry and who therefore may have taken a softer line than some supporters of the bill.
There is still a long, complicated path to tread before the final set of rules is revealed, but the Gauzes report shows there is still plenty of lobbying to be done by the (within Europe at least) mainly UK-based industry.
Supporters of the bill, in contrast, keen to strike while the regulatory iron is hot, must surely be pleased that these measures are being recommended.
All these restrictions will change the nature of hedge funds into mutual funds.
It will be better for them to enforce ethical rules (eg no insider trading) but leave out the investment details.
After all, hedge funds are meant to take extreme risks to gain the maximum possible profits
