By Neil Wilson
As industry leaders do battle in Washington and Brussels about what rules hedge funds operate under, another struggle is going on behind the scenes. It is arguably about something more fundamental—the heart and soul of the industry.
Industry lobby groups—like the Managed Funds Association in the United States and the Alternative Investment Management Association internationally—appear to have done an increasingly effective job over the past year or so. They have been much more vigorous and concerted than in the past at explaining the industry's case to lawmakers and regulators and, so far at least, heading off invasive rules and restrictions that could cripple the business.
This is a continuing battle. Nobody knows yet, for instance, how President Barack Obama's proposed restrictions on bank trading activities will affect hedge funds. Theoretically, such restrictions could be a boon by barring an important source of current competition from the bank prop desks. But there could also be unforeseen negative consequences—if, for instance, banks are also inhibited from providing key prime brokerage services. Nobody yet knows how workable these proposed rules will be. Before they go into effect, the U.S. administration will need to define where "legitimate" bank treasury activities stop and "unacceptable" prop trading starts.
Over in Europe, AIMA has done a great job to get the City regulator, the Financial Services Authority, as well as the Bank of England, the U.K. government and even the House of Lords, on the side of hedge funds and against the proposed new Alternative Investment Fund Managers Directive put forward last year by the European Commission. This too is a continuing battle—and against entrenched opposition, mainly in Germany and France, where the attitude to hedge funds is often hostile.
In previous years, AIMA, perhaps unfairly, was seen by many as a relatively weak lobbying group, dominated, some felt, by too many small and relatively insignificant players. That was hardly surprising, given the reluctance of major managers to stand together in a common cause, due not least to the fierce competition among them.
To get its message across more effectively, AIMA has been much more successful over the past couple of years in persuading bigger players to speak up publicly. Top managers, such as Paul Marshall, co-founder and chairman of Marshall Wace Asset Management, and Doug Shaw, head of the hedge fund business at BlackRock, have helped lead the fight, actively engaging with the political process. They have clearly had an effect, and a positive one, on the industry's ability to respond to the challenges facing it since the global financial crisis.
On the other hand, as some smaller players whisper, the bigger funds are not necessarily representative of the industry as a whole. According to some, the interests of the few bigger firms and those of the many smaller firms are not perfectly aligned. While some see smaller players as merely mavericks who lack clout, others suspect bigger players of being asset gatherers who do not share the same purity of purpose. As one boutique manager in Asia told me recently: "We need to remember that we are supposed to be about alternative investments—not mainstream."
It is an argument with merits on both sides. The smaller, newer players have often been a source of innovations. But bigger firms have been innovators too. Not least is Marshall Wace, which invented the alpha capture system for harvesting sell-side ideas in its TOPS process, as well as being among the first to launch listed vehicles, onshore UCITS III-compliant versions and most recently an exchange-traded fund (ETF).
Nevertheless, it does seem that the industry, at least in Europe, is increasingly dominated by the top 20 or so firms. As the popular saying goes, nobody gets fired for hiring IBM. The tendency of allocators to play safe by sticking with established brand names such as Brevan Howard Asset Mangement, BlueCrest Capital Management and Lansdowne Partners has been very apparent as such firms saw assets flood into them in recent months.
This growing institutionalization brings various benefits as more firms offer a more professional service to investors, including greater transparency. As a result, though, the industry also seems to be developing a discernibly more corporate feel. It will be interesting to see how much further this trend goes, and how much of its original, fiercely independent-minded and entrepreneurial traits the industry can retain.