Has the moment for greater UK hedge fund regulation passed?

Date: Tuesday, January 27, 2009
Author: Laurence Fletcher, Blogs.reuters.com

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.

Meanwhile, the UK’s temporary ban on short-selling financials has drawn plenty of criticism from hedge fund managers and analysts, who point to bank shares underperforming the market by more when the ban came into force than before.

Finally, the Hedge Fund Standards Board’s best practices are helping address issues of transparency and governance among others.

The situation is different in the U.S., where Treasury Secretary nominee Timothy Geithner has pledged to pursue hedge fund registration.

But those politicians and others in the UK hoping for a new set of rules for the hedge fund industry are likely to find a very different, and less influential, target to the one they saw two years ago.