Regulator to demand more data from hedge funds

Date: Thursday, March 19, 2009
Author: Laurence Fletcher, Reuters.com

Britain's financial regulator is to ask London-based hedge fund managers for more information on their holdings and risk exposure, mirroring a plan recently put forward by the industry.

The Financial Services Authority (FSA) said on Wednesday the information should be used to weigh the risks hedge funds and similar vehicles could pose to the financial system.

The report by FSA chairman Lord Adair Turner, commissioned by Prime Minister Gordon Brown at the height of the banking meltdown last October, said regulators need the power to make rules in areas such as capital and liquidity if hedge funds' activities begin to mirror those of banks or they believe funds pose systemic risks.

Andrew Baker, chief executive of the Alternative Investment Management Association (AIMA), which represents more than 1,200 firms globally, said the recommendations mirrored AIMA proposals put forward last month on disclosure of systemically significant positions and risk exposures.

"It's going to set off a useful debate between now and the G20 (summit next month)," he told Reuters. "We think that (reporting) no more frequently than quarterly would be the right sort of flavour."

Regulators have been wary of the systemic risks posed by hedge funds since the 1998 collapse of Long Term Capital Management and the ensuing market crisis, although hedge fund executives say there has been little evidence of systemic risks in the current crisis.

"It (disclosure of information) makes a lot of sense," said one London-based hedge fund executive who requested anonymity.

"I think their fear is that a hedge fund could get pretty big and if it uses leverage ... and gets into financial difficulties it could have knock-on effects."

Baker said the FSA's recommendations could hit the returns of some highly-leveraged funds specialising in complex credit strategies.

"Banks have to have tier 1 capital and the same thing would apply to funds -- you would sit on extra cash to meet a potential run. But if you had to sit on 10 percent cash, it obviously would depress returns."

(Editing by Jon Loades-Carter)