With a new report predicting hedge fund assets will drop 20 percent this year, regulators moved to impose new rules that some fear would stifle the sector”™s recovery.
Hedge fund regulation was debated both in late March at a meeting of the U.S. Senate Committee on Banking, Housing and Urban Affairs and at the Group of 20 economic summit in London. The outcome of the parallel talks could have a significant impact on the Fairfield County economy, which boasts one of the five largest concentrations of alternative investment companies in the world.
In a 70-page manifesto published at the G-20 meeting last month, the U.S. and other nations agreed to amend their regulations to ensure that sufficient oversight exists over financial entities, including private pools of capital like hedge funds that have long been shielded from disclosure rules governing banks and insurance carriers.
That includes requiring hedge funds or their managers to be registered and to disclose “appropriate” information on an ongoing basis, including the degree to which they are leveraged with excessive debt relative to assets.
Under the G-20 plan, hedge funds would have to report their size, investment style and links to markets that have systemic importance. Regulators would monitor funds to assess exposures of various counterparties, including prime brokers for hedge funds. And regulators would assess the volatility and liquidity of markets on an ongoing basis.
To dissuade companies from relocating their operations to nations that do not adopt the measures, the regulations could mandate increased disclosure requirements for all companies doing business with such nations, which regulators hope will force those nations to fall in step with the Group of 20.
At the same time, the U.S. Senate Committee on Banking, Housing and Urban Affairs co-chaired by Sen. Chris Dodd considered new legislation on hedge funds, while soliciting input this month from industry representatives like the Managed Funds Association and the Coalition of Private Investment Companies, both based in Washington, D.C.
“The systemic risk regulator should have the authority to directly intervene to ensure an orderly dissolution or liquidation of the market participant,” said Richard Baker, CEO of the Washington, D.C. based MFA.
“Hedge funds have important market functions in that they provide liquidity and price discovery to capital markets; capital to companies to allow them to grow or turn around their businesses; and sophisticated risk management to investors such as pension funds to allow those pensions to meet their future obligations to plan beneficiaries,” Baker said. “Smart regulation helps to ensure stable and orderly markets, which are necessary for hedge funds to conduct their businesses.”
Any law or regulation affecting the hedge fund industry should include a half-dozen principles, according to the Coalition of Private Investment Companies. CPIC argues regulators should ensure that regulation:
Ӣ is scaled to the size and complexity of financial activities;
Ӣ covers companies that perform systemically significant functions impacting markets;
Ӣ gives authorities the power to follow the activities of entities regardless of location;
”¢ places greater scrutiny on “triple plays” in which companies are originators, underwriters and investors in the same asset
Ӣ enforces transparency, and practices it.
