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Capital adequacy requirements is a topic that lately may have become lost amid the chaos of the financial markets, but now the Alternative Investment Management Association says the hedge fund industry needs make this a priority if managers are to come through the current turbulence intact.

Although the UK's Financial Services Authority requires all investment firms to comply with the Internal Capital Adequacy Assessment Process for quantifying risk, Aima argues that there is greater need than ever for firms to have robust procedures in place. 'The hedge fund industry has embraced the capital adequacy debate proactively and the sophisticated risk management techniques undertaken by hedge funds make this framework possible,' says Aima deputy chief executive Andrew Baker.

It may now be time for the FSA to put in place more concrete and better-policed requirements. Chairman Lord Adair Turner told delegates at a recent conference: 'Regulatory regimes will, I am sure, demand more capital in financial intermediation, both through higher capital requirements for banks and more effective steps to prevent highly-leveraged shadow banking entities escaping capital regimes.'

But now it is time to walk the walk. The FSA has shown that it can take tough measures with its recent clampdown on short selling, whatever one thinks about the advisability or effectiveness of its approach. It's probably time for that firmness to be directed toward ensuring that all institutions, from banks to hedge funds, have the capital they need to operate without risking disaster.


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