By Neil Wilson
It's certainly not the end of the matter - it's probably
only the end of the beginning. More registration, reporting and
oversight requirements for hedge funds now seem inevitable.
Yet, following the recent G-20 Summit in London, it seems that
these new requirements are likely to be more sensible,
proportionate and appropriate - maybe even beneficial to the
long-term health of the industry - and not the kind of drastic,
sweeping overreaction many had feared.
The devil, of course, is in the details. But it appears that
the major restrictions on hedge funds called for ahead of the
G-20 by world leaders like President Nicolas Sarkozy of France
and Chancellor Angela Merkel of Germany have been averted, at
least for now. What those restrictions would have been is far
from clear. But in a febrile political atmosphere with public
opinion inflamed by the scale of the global financial crisis -
and the perceived stupidity and avarice of bankers - some
unpleasant outcomes were distinctly possible.
Various factors have made the fate of hedge funds in this
political cauldron quite precarious. One was an assumed guilt
by association - with hedge fund managers widely viewed as part
of the same culture of greed as the bankers, gorging from the
same trough. This caricature may not have been completely fair,
but it contained enough grains of truth to make another factor
potentially devastating: the secrecy of hedge funds and the
associated chronic inability of the industry to get across any
sort of positive message about itself to the wider public.
In any event, the Alternative Investment Management
Association - the international trade body for hedge funds -
seems to have proved up to the task of getting the G-20 to
steer in the right direction. AIMA, criticized by some in the
past for not being able to give the industry a clear and
powerful voice, appears to have responded to the imminent
dangers just in the nick of time. Led by chief executive Andrew
Baker and new chairman Todd Groome, who was previously with the
International Monetary Fund, AIMA marshalled its arguments
effectively at the London conference.
Viewed from the outside, it's not hard to see why hedge fund
managers and bankers have been tarred with the same brush in
the public mind. Many hedge fund people have come out of the
investment banking world, and the relationship between the
industries - through execution, clearing, prime brokerage and
so on - has been symbiotic, at least to some extent. For the
public, therefore, it's only a small leap to conclude that
hedge funds, like bankers, have simply found clever (in other
words covert and illicit) ways of making themselves rich in
return for delivering little or nothing of value to the
Of course, too many hedge fund managers have raked in huge
fees for performance in previous years - only to have their
investors lose those previous gains and more in the treacherous
markets of the past year.
However, it is a very big step from there to conclude that
hedge funds were somehow to blame for the global crisis. Hedge
funds as a bloc deploying leverage may have exacerbated the
bubble in credit and certain other assets. And there may be
some substantive ongoing problems with fraud affecting the
industry - which was demonstrated most spectacularly in the
Madoff case. But it is clear that the banks did not make huge
losses by lending to hedge funds.
As AIMA was able to argue, the industry's role in the
economic crisis has been marginal. AIMA's statement welcoming
the G-20 communiqué added: "Last year was the worst year
on record for the world's hedge fund industry and of course our
members want stability returned to the global economy as much
as everyone else."
The G-20 proposals on hedge funds - for enhanced oversight
of funds that are "systemically significant" - do not appear to
require much from the industry. The vast majority of hedge
funds are, of course, much smaller than banks, and also use
much less leverage.
G-20's proposals on so-called tax haven domiciles also seem
comparatively mild at this stage. Although there was a longish
gray list of domiciles that need to take further actions to
comply with the major economies, only four places were on the
initial blacklist - none of which are used much, if at all, by
hedge funds - and all of them responded quickly to say they too
That said, it seems likely that major hedge funds will seek
to do more in onshore products and structures - such as funds
compliant with UCITS III rules in the European Union - as some
big European firms like BlueCrest and Brevan Howard have
already been doing. A hedge fund industry that emerges from
this crisis bigger, stronger, more transparent, more regulated
and more onshore does not seem such a bad thing.