Funds Hub

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.

Made to sweat on Madoff

Appearing before a Treasury Select Committee can’t be enjoyable at the best of times.

But when your clients may have lost around 2.3 billion euros in Bernard Madoff’s alleged fraud, it must be positively painful.

“Your due diligence was absolutely and utterly duff,” Committee Chairman John McFall told Abbey chief executive and Santander executive vice president Antonio Horta-Osorio. “When you’re investing other people’s money you should have adequate due diligence.”

McFall added to Santander’s pain by telling the world he had watched evidence from Harry Markopolos, the man who had tried to blow the whistle on Madoff, on YouTube.

Markopolos, he said, had taken five minutes to spot Madoff, in part because his investment returns were “a 45 degree” angle.

Horta-Osorio defended Santander’s due diligence processes and repeated that the bank had offered to compensate clients, but, as has often been the case in these hearings, few of the MPs looked that convinced.

Hedge fund diversification

Tuesday’s Treasury Select Committee grilling of the hedge fund industry proved a lively affair (if somewhat hot in a crammed Westminster room), but you have to wonder how well diversified their choice of witnesses is.

As well as Chris Hohn, co-founder of TCI, the Committee picked BlackRock’s head of alternatives Douglas Shaw — a previous employee of TCI.

Another witness was Marshall Wace’s Paul Marshall. Paul was former chief investment officer for continental European equities at Mercury Asset Management – now part of BlackRock.

But then again, this isn’t the biggest of industries to choose from.

Has the moment for greater UK hedge fund regulation passed?

Tuesday’s grilling of UK hedge fund executives is likely to create plenty of noise but produce little in the way of new rules.

While media-shy TCI founder Chris Hohn and others will face tough questions from the Treasury Select Committee on financial stability, short-selling and other issues, it nevertheless seems that the pro-legislation lobby’s position may be weaker than it has been in recent years.

For one thing, many hedge funds simply do not have the financial clout — and therefore carry the associated risks seen by some politicians — that they once did.

At the start of 2007 hedge funds were booming and assets had swelled to more than $2 trillion, according to HedgeFund Intelligence. Coupled with the substantial leverage employed by some strategies, hedge funds were a significant force in many markets.

Today, leverage has been cut back, investors are pulling out assets, and many funds are playing it safe and sitting on cash.

While never to be dismissed, a repeat of LTCM, where one huge fund dominated a market and many players mimicked its movements, looks less of an threat now.

Activists funds, meanwhile, whose tactic of buying into firms and calling loudly for “shareholder value” has caused much controversy, have less to work with in a bear market where firms are unwilling or unable to do deals or take on debt.