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Hedge fund managers tell UK parliamentarians industry is not to blame

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Leading members of the hedge fund industry have seized the opportunity to tell UK members of parliament that their industry is not to blame for the meltdown of the global financial industr

Leading members of the hedge fund industry have seized the opportunity to tell UK members of parliament that their industry is not to blame for the meltdown of the global financial industry.

A hearing convened by the Treasury select committee on Tuesday attracted industry figures such as Marshall Wave chairman Ian Marshall, chief executive Chris Hohn of The Children’s Investment Fund Management and Stephen Zimmerman, chairman of NewSmith Asset Management, as well as Andrew Baker, chief executive of the Alternative Investment Management Association.

Grilled by MPs on the role played by hedge funds and other short sellers in the collapse of confidence in UK banks, the managers insisted that any impact of short selling was far outweighed by long-only investors fleeing stocks in which they had lost faith because of growing doubts over the quality of their assets.

They also defended the regulatory system operated by the Financial Services Authority, which applies to managers of both hedge funds and traditional investment vehicles, arguing that the FSA’s approach made it unlikely that a mammoth Ponzi scheme such as that of which Bernard Madoff has been accused could take place in the UK.

Although the questioning by MPs was at times vigorous, even hostile, Baker believes the hearing was an important step by the industry to improve its popular reputation by imparting a better understanding of what it does and how to critics.

‘We were grateful for the opportunity, because it’s the first time that hedge funds have ever made an appearance before any parliamentary committee,’ he says. ‘A lot of demystifying is required in the period ahead. We need to make it much clearer what we do for investors and for the market in general. There appears to be a lot of confusion about the variety of strategies that hedge funds offer and of the different types of manager.

‘I suspect today is the starting point of more engagement to get across the message that not only do we serve a useful function in the markets but are a significant employer,’ Baker adds, noting that Aima has just published research indicating that the hedge fund industry is responsible for around 40,000 jobs in the UK directly and through service providers.

Acknowledging that the MPs ‘had done their homework pretty carefully’, Baker says the industry representatives were keen to make clear that hedge fund managers in the UK are regulated like any other part of the investment management industry. ‘The confusion creeps in over where the funds are based, as opposed to where the managers are based,’ he says.

He and his colleagues also defended the Hedge Fund Standards Board against scorn that a year after the launch of the initiative to encourage managers to adopt common standards voluntary, only 34 had signed up to the board’s code of practice.

‘You’ve got to give it time to work,’ Baker says. ‘It’s a comparatively recent initiative – managers only had to conform to the standards as of December 31, so beating them up as of January 27 is slightly unfair.’

He notes that some managers that have expressed reluctance to sign up to the standard formally do in fact adhere to them in practice, attributing their reticence to ‘the burden attaching of having to provide third-party authentication’, especially for firms with a range of investment businesses, at a time when funds of all kinds are grappling with turbulent and depressed markets.

Baker notes that some members of the industry may have changed their minds about signing up to the standards since Aima took a survey last June, adding: ‘I suspect the whole area of industry initiatives, whether they are regarded as self-regulation or self-improvement, will come under scrutiny.’

He accepts the need for measures such as a (preferably uniform) disclosure regime for short selling and the restriction of naked shorting, but hopes that the industry can avoid the knee-jerk tightening of regulation for its own sake.

‘We’ve all in favour of good regulation, because good regulation is good business,’ Baker says. ‘But hopefully the idea that whenever there’s a problem, it must be because there’s not enough regulation, won’t gain too much traction. Just layering up on the rulebook is not necessarily going to help anyone.’

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