AIMA Says Hedge Funds Are 'Safe To Fail

Date: Friday, July 8, 2011
Author: HFN Daily Report

A London-based financial organization said Thursday that hedge funds should not be subject to regulations currently being discussed in the U.S.

The Alternative Investment Management Association, which has 1,250 corporate members including those in the hedge fund industry, argued that hedge funds are not a "risk to financial stability" across the world.

The recently created U.S.-based Financial Stability Oversight Council is looking at which non-bank financial companies should be considered "systemically important" and thus be subject to further regulation by the Federal Reserve.

One of AIMA's arguments is that the hedge fund industry, with approximately 10,000 hedge funds managing a combined $2 trillion in assets, is still small compared to other financial sectors such as investment banking.

AIMA also pointed out that in 2008, at the height of the financial crisis, more than 1,400 individual hedge funds closed or were liquidated without impacting the "stability of the financial system at large."

AIMA Chairman Todd Groome said, "The 2008 experience shows that hedge funds are 'safe to fail', even if they are not fail-safe. Moreover, hedge fund activities do not typically contribute to pro-cyclical market dynamics; they tend to be contrarian or to look for market inefficiencies and through their investment activities tend to make markets more efficient."

Groome, however, did agree with hedge fund managers registering with the SEC as a means of regulation.

The Securities and Exchange Commission adopted new rules in June, introduced under the Dodd-Frank financial reform bill, requiring that hedge fund firms and private investment advisers with assets under management of more than $150 million will have to register with the SEC. The rules go into effect in March.