Hedge funds may face increased regulatory oversight

Date: Wednesday, April 15, 2009
Author: K.R> Srivats, Hindubusinessline.com

Hedge funds may now face higher degree of direct regulatory oversight in most G-20 jurisdictions. There is a consensus within a G-20 working group, co-chaired by the RBI Deputy Governor, Dr Rakesh Mohan, that authorities need better information on the structure and activities of hedge funds as well as on the risks they are exposed to.

The committee had in its recent report released ahead of the G-20 leaders Summit at London in early April suggested that private pools of capital, including hedge funds, or their managers be required to register with financial authorities and disclose appropriate information to assess the risks they pose.

The data collected from hedge funds would likely include the size, investment style, leverage and performance of the fund along with its participation in certain systemically important markets.

According to the report, many members of the G20 Working Group 1 — “Enhancing Second Regulation and Strengthening Transparency” — had expressed concern that some hedge funds – or group of hedge funds – may generate systemic risk and impose externalties on the financial system.

The report had suggested that it would be appropriate for regulators to monitor common metrics to assess the significant exposures of counterparties, including prime brokers for hedge funds. It has been recognised that counterparties could be a mechanism through which the failure of a systemically important hedge fund or cluster of hedge funds would be transmitted to the broader financial system — and potentially the real economy.

On hedge funds, there is now a consensus on the importance of achieving a co-ordinated policy response internationally. Currently, there is some form of oversight over hedge funds in most G-20 jurisdictions.