Ifina’s organisation in June of a networking evening at BVI House in London, featuring speakers representing the global hedge fund industry and the funds sectors in the British Virgin Islands and Switzerland, represent the latest step in an initiative launched last year to stimulate a debate on the future of the hedge fund sector in the wake of the financial crisis.
Amid knee-jerk reactions from many governments and regulatory authorities, as well as uncertainty about market trends and caution among investors, we felt it important to bring to the table industry members to examine how the market turmoil and other difficulties that had affected fund managers, investors and service providers could be avoided, or at least mitigated, in the future.
The issues weighing on the industry have not gone away. Drafted in extreme haste in spring 2009, the European Union’s Alternative Investment Fund Managers Directive still awaits final agreement between the EU’s three decision-making bodies. Although some of the aspects of the original legislation that most infuriated industry professionals have been moderated in subsequent drafts, there remain many points of contention, not least the question of whether and how the directive will permit non-EU funds and managers to access the European market.
The latter issue obviously remains crucial to the Swiss alternative fund industry, yet at the same time the country is benefiting from a certain degree of disillusion among hedge fund managers with tax and regulatory matters within the EU in general and in London in particular. Meanwhile, reports of the imminent decline of the BVI and other offshore fund jurisdictions have proved at the least premature as they benefit from a revival in new fund launches.
At seminars organised by Ifina last autumn at the Zurich and Frankfurt stock exchanges, we emphasised that the alternative fund industry needed to be proactive in getting its message out and to speak directly to members of the wider financial sector about its embrace of best practice, particularly the use of independent service providers, to provide reassurance to the investment community.
There’s also an ongoing need to address public authorities and tackle assumptions by politicians and regulators that are not borne out by market reality. Take the moral panic about derivatives, which has been going on in one for or another for years. Rather than standing by in the face of blanket restrictions, it’s up to industry members to make the case for derivatives as a risk management tool and to explain the difference between hedging and speculating.
Greater knowledge and understanding of what the industry does and how it works would be an enormous advantage in restoring trust among investors. For example, they would benefit from a better understanding of the role played by hedge fund administrators not just in ensuring that funds’ numbers add up but as an early warning system for problems at the funds they service, whether through poor decision-making, negligence or fraud.
Regulators certainly increasingly view service providers as an integral part of the checks and balances on the industry, whether their role is explicit or otherwise. Administrators are first in line to spot any untoward events, such as sudden changes in the volume of activity, because they see the trades from the investment manager and reconcile them with the bank or broker. That’s why the fund administrator is the crucial element to the safety of any fund.
Derek Adler is a director of Ifina (UK)