AIMA Rejects FSA's Call For Closer Scrutiny Of Hedge Funds

by Carla Johnson, Investors Offshore.com

31 October 2005

The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, has issued a response to 'Hedge funds: A discussion of risk and regulatory engagement,' a paper issued by the UK Financial Services Authority earlier in the year.

AIMA’s response to the FSA papers, which were issued in June 2005, has been prepared by the largest working group of members that AIMA has ever assembled to work on any regulatory consultation.

AIMA stated that it 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.

However, the association said that it does not share the FSA’s perception of undue risk likely to be caused to markets by hedge funds, either 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 rumours, there has been no serious market disruption," AIMA's response stated.

"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," it added.

AIMA also refuted claims that there is a higher level of fraud within the hedge fund industry than elsewhere, noting that the UK has, to date, had a clear record with regards to hedge fund fraud.

"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," the association noted.

AIMA has welcomed the establishment of the FSA’s ‘centre of hedge fund expertise’, which is tasked with monitoring the activities of the largest hedge funds operating in the London markets. However, it qualified its support by observing that size alone is not a sufficient criterion for enhanced supervision, suggesting that both small and large hedge fund managers may run strategies that could be deemed as "high risk."

AIMA also disagreed 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," the association commented.

On valuation issues, AIMA does not believe that regulatory action alone is the best way forward, and it called for an industry-led, together with internationally-coordinated, initiative towards greater standardisation.

"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," the association said.

AIMA proposed that its own 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," it concluded.

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