Pressure Grows For Hedge Fund Transparency

by Carla Johnson, Investors Offshore, London

01 February 2007

As regulators around the world worry over the risks posed by hedge funds both to individual investors and markets in general, a member of the European Central Bank's Governing Council said last week in Davos that a Code of Conduct would be better than more regulation.

Council member Axel Weber told Reuters that a voluntary code of conduct by the hedge fund industry would be an important first step towards improving transparency. 'I prefer a market-based orientation to regulatory actions,' said Weber, 'but we have to see how deep we can wade into these waters by having an open dialogue with the hedge funds.'

'We need to try hard and we need to make a bigger effort to get the industry to make more voluntary commitments and maybe do a bit of arm-twisting along the way,' he added.

The approach of the US is more to tighten the rules for investment in hedge funds: the Securities and Exchange Commission said recently that it is planning to increase the minimum net worth of a hedge fund investor from the current US$1m to $2.5m.

There are transparency concerns as well, though. In Washington last week, William Donaldson, ex-Chairman of the SEC said: 'The rulemaking doesn't address the ongoing problem of the rapid growth of hedge funds and the lack of knowledge that regulators have; it is an increasing concern not only in the United States, but to regulators around the world.'

Perhaps pushed by institutions wanting to reduce the risks of their hedge fund investments, a number of senior US regulators, both in Congress and at the SEC, are moving in the direction of stricter regulation, although the courts' demolition of the SEC's registration plans last year should hardly give them encouragement. On the other hand, the new Democrat ascendancy in Congress will perhaps open the flood-gates to a tide of restrictive Democrat-inspired legislation.

Last year saw bad news from a number of hedge funds. Apart from the high-profile US$6bn loss by Amaranth, which is now liquidating itself, a large fund run by Vega Asset Management Partners was said to have lost 25% of its value in just two months. Vega managed a total of more than US$10bn in 2004, but reportedly now has less than US$6bn under management. Of course, that may be due to redemptions, not losses. Who knows?

Vega's losses are thought to have been incurred on short positions in sovereign bonds, and a bet that the Japanese yen would appreciate against the euro.

Investor sentiment favours larger fund managers, such as the highly successful Man Group, and many observers say that a period of consolidation is likely as smaller, weaker funds run for cover in the arms of their larger peers.

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