AIMA responds to FSA hedge fund discussion paper
AIMA has delivered a robust response to the UK FSA's discussion paper, stressing that regulation should not weaken the UK's competitive advantage.
The Alternative Investment Management Association (AIMA) has issued its response to the FSA's discussion paper on hedge fund regulation.
AIMA's response to the paper - DP05/4, "Hedge funds: A discussion of risk and regulatory engagement", which was issued by the FSA on 23 June, has been prepared by the largest working group of members that AIMA has ever assembled to work on any regulatory consultation. All sectors of the alternative investment management industry in the UK and Ireland have been represented in the group.
AIMA welcomes the FSA's several acknowledgements of the benefits that hedge funds bring to financial markets and has also noted comments made by the FSA's executive in recent weeks, referring to appreciation of hedge funds' increasing importance and contribution to dynamic marketplaces and to the UK as the centre of hedge fund management in Europe. AIMA, however, does not share the FSA's perception of undue risk likely to be caused to markets by hedge funds, singly or in multiples; in AIMA's view, no evidence has been offered to suggest that hedge fund managers are likely to cause any more disruption to the market than other players.
Throughout the first 10 months of 2005, and contrary to media rumors, there has been no serious market disruption. As in most years, a number of hedge funds may have suffered reversals in market performance and there has been a steady attrition of unsuccessful funds. However, in a free market, this is not a sign of ill-health in the market as a whole.
AIMA also points out that there is no apparent evidence of a higher level of fraud within the industry than elsewhere; further and most significantly, the UK has, to date, had a clear record in this regard. AIMA rejects the suggestion that standards of systems and controls, compliance and risk management are somehow lower among hedge fund managers than other, more highly regulated firms: many specialist firms regard themselves as having 'leap-frogged' more traditional providers into next-generation systems and investment techniques, partly because of superior profitability and partly because of the lack of 'legacy' systems/issues.
AIMA has welcomed the establishment of the FSA's 'centre of hedge fund expertise', assuming that it will be (and remain) properly and adequately resourced, and suggests that it be allowed to 'bed down' before any other action is considered. AIMA suggests, however, that size of firm in and of itself is not a criterion for enhanced supervision: both small and large managers may run strategies, which might make them 'high impact'.
AIMA does not agree that new 'permissions' for hedge fund management and/or prime brokerage are necessary or desirable. If there are to be changes, AIMA would prefer that industry participants be required to notify the FSA when commencing such activities.
As to valuation issues, AIMA does not believe that regulatory action alone is the best way forward; industry-led, together with internationally-coordinated, initiatives (including AIMA's own work on asset pricing and fund valuation) towards greater standardisation should assist. Again, the issues raised in respect of valuations are not unique to the hedge fund industry. It is the norm, however, to use third party administration in the European and Asian hedge fund industry.
AIMA broadly accepts that some form of 'code of conduct' might be a positive step but suggests that this should evolve from an industry initiative. It suggests that AIMA's Sound Practices Guides might be expanded and updated with the involvement and endorsement of the FSA. The industry is likely to accept principles-based practices.
AIMA, which now has over 270 corporate members in the UK, welcomes the FSA's acknowledgement that any increase in regulation should not weaken the UK's competitive advantage. Any additional regulation must be proportionate, as the FSA itself has emphasised in issuing this paper.
AIMA's full response may be seen here -- www.aima.org/uploads/AIMAResponsetoDP05.4-27Oct.pdf.
AIMA is also responding now to the separate FSA's paper, DP05/3, "Wider-range Retail Investment Products".
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