Hedge fund industry representatives have welcomed the agreement among the G20 leaders in London to work toward stabilisation of the global financial system and emphasised the role the indu
Hedge fund industry representatives have welcomed the agreement among the G20 leaders in London to work toward stabilisation of the global financial system and emphasised the role the industry can play in providing counter-cyclical risk capital.
However, Alternative Investment Management Association chief executive Andrew Baker also notes that the hedge fund industry’s role in precipitating the financial was ‘marginal’ and cautions against assuming that many hedge funds provide banking services and should be regulated as such.
Following the G20 summit on Thursday, the assembled leaders pledged to maintain ‘an open world economy based on market principles, effective regulation, and strong global institutions’ as a foundation for sustainable globalisation and rising prosperity for all.
In addition to a combined fiscal stimulus totalling as much as USD5trn, the G20 leaders promised ‘to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions’.
The statement noted that ‘major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector.
‘Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking.’
The G20 leaders have agreed to establish a new Financial Stability Board with a strengthened mandate, as a successor to the Financial Stability Forum, which should collaborate with the International Monetary Fund to provide early warning of macroeconomic and financial risks and the actions needed to address them.
They also promise to ‘reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks; to extend regulation and oversight to all systemically important financial institutions, instruments and markets’, including ‘systemically important hedge funds’. The new regulatory philosophy should also prevent excessive leverage and require buffers of resources to be built up in good times.’
The G20 has effectively delegated action against ‘non-cooperative jurisdictions, including tax havens’ to the Organisation for Economic Co-operation and Development, which has published a list of countries assessed against the international standard for exchange of tax information, saying: ‘We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over.’
Says Aima’s Baker: ‘Last year was the worst year on record for the world’s hedge fund industry, and our members want stability returned to the global economy as much as everyone else. The issue of financial stability is the most important currently facing global policy makers, so we welcome the new Financial Stability Board and look forward to working as closely with it as we have with its predecessor, the Financial Stability Forum.
‘We are determined to do everything we can to assist international policy makers in preventing systemic instability in the future and the most important way we can do that is through the provision of information. If policy makers can get a better sense of concentrations of risk in global financial markets, they will be better placed to prevent future instability.’
He argues that Aima has already taken the initiative by supporting the provision of systemically significant information by large hedge fund managers to their national regulators. The association’s new policy platform published in February stressed its support for a global manager authorisation-supervision template on the lines of the Financial Services Authority’s regime in the UK.
But Baker adds: ‘It is right that systemically significant institutions should be subject to oversight. We would however note the conclusions in his recent review of Lord Turner, who pointed out that hedge fund leverage is typically well below that of banks, about two to three times on average, compared with levels of up to 50 times with some banks.’
He also cites approvingly Turner’s view that today hedge funds in general are not bank-like in their activities, saying: ‘Although we agree that any entity that provides banking services should be regulated as a bank, the vast majority of hedge funds do not fall into this category.
‘The current crisis is a banking crisis and major international reports on it so far have concluded that the hedge fund industry’s role was marginal. Indeed, there is increasing awareness that our industry can play a positive role in assisting the recovery because of the willingness of hedge funds to provide counter-cyclical risk capital. The US has taken the lead in this respect with the Public-Private Investment Program, and we hope that other countries will follow this lead.’
