AIMA calls for global response to issues touching hedge funds

"AIMA is dealing with policy makers and regulators at a national, European and international level on the future regulatory framework of the hedge fund industry. While we do welcome this initiative by the European Commission, the current problems are global and, therefore we believe that ultimately a coherent, global response is needed," said CEO Andrew Baker.

The consultation paper, published on December 18, 2008, focuses on the activities of the global hedge fund industry. The commission is looking at what the EU regulatory response for hedge funds should be to issues such as systemic risk, risk management, market integrity and efficiency, transparency towards investors and investor protection.

The European Commission is concerned about the way hedge funds may or may not be affecting markets as well as the industry's use of leverage and shorting. The consultation paper poses several questions about the internal processes of hedge funds particularly as regards risk management, as well as leveraging and the practice of shorting.

The paper said hedge funds do not always provide sufficient information to allow investors to assess risk. The commission is also worried about the impact hedge funds may have on the markets through the sheer volume and often high frequency (through computer models) of their trading.

While AIMA believed the Commission was correct to address areas of concern about the hedge fund industry, it was keen to point out that the European hedge fund industry has shown itself to be robust in difficult market conditions.

"The hedge fund industry in Europe and elsewhere has been hit very hard by the current crisis, but has responded in an orderly way and has not triggered any systemic risks. Hedge funds did not cause the present market turmoil and because they have an essential role in providing liquidity to the markets, are important in assisting any eventual recovery," said Baker.

He added that AIMA were looking forward to working with the Commission and other bodies to formulate a regulatory framework for the future.

Antonio Borges, chairman of the Hedge Funds Standards Board, agreed with the AIMA call for a global response. "The consultation paper dealt with all the relevant issues but it is important that a common global approach must be agreed on to push the debate further so interests can all be aligned," said Borges.

He believed the Commission was right in asking the industry about how it works and affects the markets. "If it is a concern, it is important to debate the issue and clarify a consensus. Transparency with respect to investors is one of the key foundations to the hedge fund industry," he said.

"I am pleased that the Commission is going through the process of gathering information and posing questions before making any immediate moves. While I did not agree with all the questions posed by the report, I am interested in seeing how the Commission will use the responses to the consultation to drive the debate further," noted Borges

A hedge fund manager which wished to remain anonymous believed many of the issues highlighted by the consultation paper were unfair to hedge funds. "Hedge funds are being blamed for many of the problems with the crisis. I believe leverage and borrowing are more of a concern to those who are worried about the risks to the financial system. Not all hedge funds use leverage. If there was a tightening of regulations around short-selling and more disclosure which the Commission seem to be proposing, there should be really be a higher disclosure threshold on short positions because shorting in itself has not caused banks to collapse," he told Hedge Funds Review.

The consultation paper is part of a comprehensive commission review of regulatory and supervisory arrangements for all financial market actors in the European Union, which is to be finalised later this year.

The results of the consultation will be discussed in Brussels in late February 2009. The information gathered will be used to determine what, if any, new EU laws and regulations are needed in future.

The consultation will also form part of a wider review of adjustments needed to international regulation and oversight, something that is expected to be discussed in London in April when the G20 meet to discuss the world economy.

The deadline for responses to the European consultation paper was January 31, 2009.