Hedge Funds Support Proposed 'Systemic Risk' Regulator

by Carla Johnson, Investors Offshore.com

10 March 2009

The Washington DC Managed Funds Association (MFA), which counts some of the world's largest hedge funds among its membership, has announced its support for establishing a systemic risk regulator in the US to restore investor confidence and ensure the proper functioning of capital markets.

In testimony before the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises hearing, 'Perspectives on Systemic Risk,' Richard H. Baker, MFA President and CEO, said: “While hedge funds were not the root cause of the crisis in financial markets, the hedge fund industry, and those who invest in hedge funds, including pension funds, endowments and others, have suffered considerably as a result of the crisis and the broader economic downturn.”

Baker's testimony, delivered on March 5, continued:

“The restoration of stability and confidence in financial markets will require constructive, collaborative, efforts among policy makers and the private sector towards the shared interest of re-establishing a sound, stable financial system. We believe that goal can be accomplished, in part, through pursuit of a “smarter” financial regulatory system – one which includes a systemic risk regulator as part of that framework.”

“We are committed to being constructive participants in the dialogue regarding the creation of that framework. These are complex issues, and it is vital for policy makers to have a firm understanding of the implications of these proposals on financial markets before making important decisions.”

Baker’s testimony stressed that hedge funds were substantially less leveraged than banks and investment brokers, have performed significantly better than the overall market, and have not sought federal assistance. He also noted that hedge funds, as a significant source of private capital, can play an important role in restoring liquidity and stability to capital markets.

“In addition to providing liquidity, hedge fund managers have significant trading and investing experience and knowledge that can assist policy makers as they continue to contemplate the best way to implement the Administration’s financial stability plan,” Baker said.

“We are committed to being constructive participants in the regulatory reform discussions and working with policy makers to reestablish a sound financial system.”

MFA members include the vast majority of the largest hedge fund groups in the world who manage a substantial portion of the approximately USD1.5 trillion invested in absolute return strategies.

Baker's testimony was given on eve of the publication of a major new report by the International Monetary Fund, which has concluded that there is a need for a global regulator to manage systemic risk in the international financial system.

“If there is an underlying theme to the lessons here, it is of failing to come to grips with fragmentation," the IMF report stated.

"A key failure during the boom was the inability to spot the big picture threat of a growing asset price bubble. Policymakers only focused on their own piece of the puzzle, overlooking the larger problem," the report added.

Jaime Caruana, head of the IMF’s Monetary and Capital Markets Department, said that a "two-tiered" approach to expand regulation is needed, including more disclosure to provide enough information for supervisors to determine which institutions are big or interconnected enough to create systemic risk, and intensified regulation and oversight.

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