Funds Hub

G-day for hedge funds

After months of rhetoric by political leaders and behind-the-scenes manoeuvring by trade bodies, the hedge fund industry is finally set to learn its regulatory fate today.

Rightly or wrongly, G20 leaders thrashing out a plan to revive the global economy and prevent the excesses of recent years have hedge funds at the centre of their thoughts.

A draft communique from the Summit shows leaders will submit large hedge funds to supervision for the first time, while British finance minister Alistair Darling said today financial regulation needs to be “more intrusive” and to include hedge funds.

So far, so good for hedge funds, which have been expecting something like this for some time.

UK-based fund managers — the vast majority of the European industry — are already registered with the FSA, so this may not be such a huge step, although it will be interesting to see how the G20 distinguishes between the funds — largely based in offshore locations — and the management firms.

But with several hours of negotiations left to go, nothing as yet is finalised. Hedge funds must wait a while longer to find out how their future will look.

Best of British

There has been no shortage of calls from continental European leaders such as Angela Merkel and Nicolas Sarkozy for regulation of the hedge fund industry to limit potential systemic risks to the global financial system.

But it’s little surprise that some executives in London, where the vast majority of European hedge funds are actually based, have privately suggested the calls stem from motives rather more mixed than simply wanting better regulation.

These, they say, can be anything from these leaders wanting to hide their own political problems, to them feeling some ownership because many hedge fund investors are based in continental Europe, to a simple feeling jealousy of an industry that in Europe at least is mostly British.

Whatever the motives, the hedge fund industry has chosen to focus on the many benefits it believes it brings — to Britain.

In a pamphlet entitled “A British success story”, which has been sent to all members of parliament and leading civil servants, the Alternative Investment Management Association talks about how much UK hedge fund firms run, how many people in Britain it employs, and its benefits to the British pensions and savings industries.

As industry bodies such as AIMA strive to head off stringent regulation for the industry, UK managers will be watching and waiting — and wishing them ‘best of British’.

Reuters Hedge Funds and Private Equity Summit

Next week sees Reuters running its annual Hedge Funds & Global Equity Summit from 23rd-25th March, with some top speakers lined up.

Regulation is looming for both industries, as G20 leaders prepare to consider recommendations from finance ministers at next month’s summit in London, and is likely to be one of the hot topics.

Hedge funds are facing their biggest challenge ever in the form of high levels of outflows and record poor performance, while many have gated or suspended redemptions.

Private equity, meanwhile, faces major concerns about the sustainability of the leveraged buyout model, as high debt levels push many portfolio companies into breaching their banking covenants.

Last year’s Summit included big-hitters such as Blackstone senior managing director John Studzinski and Eclectica hedge fund manager Hugh Hendry.

Look out for stories and blogs on the Summits section of our website and on Hedge Hub next week.

Can you guess what it is yet?

Given the amount of political posturing in recent months, few hedge fund managers would deny that more regulation is coming. The question seems to be what will it look like when it finally arrives?

While the weekend’s meeting of G20 finance ministers in Horsham was dismissed by some as a damp squib, it did at least in the area of hedge funds paint part of the picture of what future hedge fund regulation might look like.

Ministers proposed that hedge fund managers are registered and that they disclose information needed by regulators to assess any systemic risks they may pose — similar to what was recently proposed by industry body AIMA.

Meanwhile, as revealed by Reuters, industry bodies AIMA, the MFA and the PWG wrote to the Financial Stability Forum, which is putting forward recommendations to the G20 ministers, on Thursday night, pledging for the first time to work together towards common standards.

However, their case could yet be weakened – the Hedge Fund Standards Board is so far not one of the signatories. While the HFSB may still pledge to work towards these goals, the episode shows there is still plenty more of the picture yet to be drawn.

Shadowlands

Executives in London’s Mayfair, home of the UK’s multi-billion dollar hedge fund community, could be forgiven for a few raised eyebrows after British Prime Minister Gordon Brown’s call yesterday to outlaw shadow banking systems and offshore tax havens.

“You are also restructuring your banks. So are we.” he told U.S. Congress. ”But how much safer would everybody’s savings be if the whole world came together to outlaw shadown banking systems and offshore tax havens.”

The terms are vague, but could be taken as a possible hint towards the lightly-regulated world of hedge funds.

The timing is hardly welcome for the hedge fund industry, coming as it does after recent calls by European leaders for more regulation of hedge funds, and ahead of concrete proposals from the European Commission next month.

However, hedge fund executives appear relaxed.

While pressure for tighter rules remains, executives believe that, whatever the comments mean, they don’t signal a major break with the UK FSA’s oversight of hedge funds — a framework viewed as relatively successful in monitoring this freewheeling industry so far.

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.

A loud and clear call

It may not have been a massive surprise, but ECB President Jean-Claude Trichet had an unwelcome message for hedge fund managers today.

The current crisis is, apparently, “a loud and clear call” to roll out regulation to all important market players, “notably hedge funds and credit rating agencies”.

For those hedge fund managers who felt, perhaps with a degree of justification, that their industry had been relatively blameless in precipitating the current crisis, that call may have been somewhat quieter and more muffled.

But the drumbeat of those calling for greater hedge fund regulation is growing and it seems increasingly likely that hedge funds will face a new raft of rules in the not too distant future.

Hedge funds have attempted to justify the slow take up of volunatry codes aimed at staving off heavy-handed regulation, but day-by-day the industry looks like it may have missed the chance of a quiet life… well, relatively speaking.

Every Cloud…

As politicians and regulators worldwide prepare a new blueprint to marshall the hedge fund industry, the organisers of the GAIM industry conference release the early agenda for their annual Monaco pow wow.

Unsurprisingly, the June 16-18 summit takes the theme: Transformation In A New World Order. And even less surprisingly, several sessions are set to ponder how to best snag a new breed of circumspect investors, and how to adapt to a new regulatory environment.

There are some introspective moments scheduled too; some 25 minutes are given over to an examination of governance and risk management lessons learned in the wake of the Madoff scandal. And after we heard last week that some investors are already convincing funds of funds to drop a layer of performance fees, another 25 minute slot will have delegates hear how they should be aligning compensation with the interests of investors.

But in an industry which prides itself on finding brass amid the muck, it is comforting to note that this year’s GAIM will kick off with a look at how to exploit upheaval very close to home.

The opening session promises to pick out the survivors and opportunities among emerging, transforming and deconstructing alternative investments firms. Or as GAIM puts it ‘New Opportunities in the Creative Destruction of an Industry.’