Speaking last week at the AsiaHedge conference in Hong Kong, Dan Waters, the UK
Financial Services Authority's Asset Management Sector Leader and Director of
Retail Policy commented on the rapid increase in popularity of hedge fund investment
in the UK.
He told delegates that:
"The spectacular growth of hedge funds in the past decade and their burgeoning impact upon the global capital markets present issues of increasing importance in the international financial community. Speaking as a regulator, it is essential that we develop a regulatory approach that is proportionate, internationally literate and effective in addressing the challenges that this market sector presents."
He continued:
"The FSA takes the view that properly run, hedge funds contribute significantly to the efficiency and liquidity of global capital markets. They allow investors to diversify their portfolios and to enhance returns. They are particularly well suited to institutional investors, who can perform proper due diligence on the fund and its managers and who can evaluate the fund's investment strategy and the fund manager's capabilities, including his administrative competence."
"So the FSA's starting point – possibly unlike the starting point of some regulators or finance ministries – is not one that regards hedge funds first of all as a threat."
He went on to add that:
"Hedge funds have been a significant item on the FSA agenda for some time now. Hedge fund managers authorised by the FSA manage investment portfolios worth about $300 billion...representing over three quarters of hedge fund assets managed by European-based firms, and around 20% of global hedge fund assets."
"We are conscious that the international hedge fund community has the resources and the technology to be portable. We are committed to playing our part in ensuring the UK remains an attractive and well-regulated jurisdiction for hedge fund managers."
Speaking with regard to the key risks posed by hedge funds, Mr Waters first of all explained that:
"It is worth stressing that the FSA believes firmly that a regulator should only intervene in markets where the market is failing to deliver acceptable outcomes, and where the costs of intervention are justified by the benefits to be delivered by regulation. Moreover, we are not a regulator who considers it sensible or desirable to deliver a regulatory regime that guarantees that failures will never occur."
He continued:
"The Amaranth case is in some respects an interesting example of what I mean, and I digress for just a moment longer. There are inquiries underway and it is not possible to comment definitively, but there are aspects of this collapse that suggest that the overall regulatory framework did operate in an effective manner. The losses were catastrophic for the firm and sudden, but the overall impact on the market relatively insignificant. The prime brokers involved appear all to have had more than adequate collateral, and the positions of Amarath appear to have been liquidated or transferred without undue disruption to trading in the sector or its underlying physical markets."
He went on to suggest that hedge funds pose the following risks:
He stated that:
"With this in mind, the FSA set up a centre of hedge fund expertise in October 2005. A priority of this team has been to enhance our oversight of 31 of the largest hedge fund managers in the UK (accounting for 50% of assets managed). These managers have a dedicated supervisor in regular contact with the firms and undertaking periodic risk assessments to develop individual risk mitigation plans with them."
"Lower impact firms are subject to baseline monitoring through regulatory returns and other types of alerts and market intelligence. The centre of expertise advises and where relevant takes the lead on the FSA response to any hedge fund cases. Furthermore, it undertakes thematic supervision, covering a wide range of entities that have hedge fund mandates irrespective of where within the FSA that group or firm is primarily supervised – the approach is designed to address the risks posed to our objectives by the industry as a whole."
A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp
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