Hedge funds oppose tougher rules on operations: AIMA

Date: Monday, June 22, 2009
Author: Euan Rocha, Reuters

The hedge fund sector is in favor of enforcing registration of hedge fund managers, but opposes any rules that would inhibit the manner in which they operate, a top industry group said on Friday.

"We are quite happy to accede to regulators on the fund manager level, but are a little reticent about regulation at the product level," Andrew Baker, chief executive of the global hedge fund body AIMA, told Reuters.

Global regulators have for long paid scant attention to the activities of hedge funds, but the sector has come in for increased scrutiny by European and North American regulators in the aftermath of the global meltdown in financial markets.

The lightly policed investment pools have been accused of exacerbating the financial crisis through their use of leverage, short-selling and secretive transactions.

AIMA contends that hedge funds cater to the needs of sophisticated institutional investors, who seek flexibility in their investment vehicles and would resent curbs being placed on the types of trade or leverage levels that their funds could employ.

But regulators on both sides of the Atlantic are unconvinced and are facing mounting political pressure to impose stricter norms on the shadowy world of hedge funds, which are allowed to engage in a much wider array of trades than tightly regulated mutual funds.

The Obama administration this week proposed regulatory changes that would make the U.S. Federal Reserve the supervisor of large, systemically important institutions.

U.S. Securities and Exchange Commissioner Luis Aguilar said oversight of hedge funds has not kept pace with funds' influence on markets, and argued one solution might be to apply some provisions of a 1940 law regulating mutual funds to hedge funds.

AIMA's Baker said he was not in favor of this, as those laws were specifically meant to protect the interests of "mom-and-pop" investors, who need extra protection.

"I think that such action would breach the boundary between the private capital institutional investor space and the retail investor space," said Baker.

REGULATORY SCRUTINY

U.S. regulators are also considering introducing rules that would force hedge funds with assets under management above a certain level to submit to regulatory scrutiny.

"We think that the cut-off for regulatory scrutiny of a hedge fund, should be closer to $1 billion, or $2 billion, but under the current political environment there is enormous pressure to drag that number down," said Baker, who argues that a lower threshold would result in regulators getting swamped with data.

The European Union is currently considering imposing much stricter regulations on hedge funds than the United States.

The proposed EU legislation could limit leverage, influence investment strategy and force funds to use specified EU-based firms for valuation, custody and other services.

"There are myriad of things in the EU-proposed legislation that provide challenges, or are just downright unworkable," said Baker, who described the proposed EU legislation as draconian.

However, Baker supported the U.S. proposal for a systemic risk regulator.

"We recognize that having a good systemic risk regulator is important. As to whether that authority sits with the SEC, the Fed, or anywhere else that's an issue for the administration."

Baker argued that hedge funds themselves do not pose a systemic risk, but agreed that certain positions they take may pose risks to other important institutions such as banks.

"In our view there is probably no hedge fund on the planet, or maybe two or three at most that are systemically important," said Baker. "If you are systemically important, it means, when you get into trouble, you get rescued. Who's about to rescue a hedge fund?"

(Additional reporting by Joseph Giannone in New York; Editing by Alex Richardson)