Hedge funds are in trouble internationally; not from the global recession or lack of investor confidence, but from financial regulatory bodies who want the funds run in a more transparent, systematic and secure way, and many hedge funds don’t like it. Hedge funds are by nature high-risk, high-yield, although that’s not how they started out. According to Investopedia, hedge funds are aggressively managed portfolios of investments with high-returns the ultimate goal. They are largely unregulated as they are designed to meet the needs of sophisticated investors. There are, however, certain governing rules that dictate what is and is not acceptable, but these are dependent on the country of origin and as a result lack standardisation.
But if the Alternative Investment Management Association (AIMA) gets their way, all of that could all change. The AIMA, which is actually a hedge fund body, supports the drive for greater disclosure and scrutiny within the industry to reduce the risk to investors. The Hedge Fund Standards Board (HFSB) must be relieved to have the weight of the large and powerful AIMA behind it, as it has come under increasing criticism for the almost complete lack of interest in its voluntary regulatory programme.
According to Christopher Fawcett, board trustee for HFSB, small hedge funds are particularly reluctant to submit themselves to any form of regulated scrutiny, and not because they engage in dodgy dealings, but because their survival comes first, and meeting standards second. Of the estimated 400-450 firms in the UK, only 33 have signed the voluntary disclosure agreement. Treasury Select Committee Chairman John McFall has gone so far as to call the HFSB “a weak industry body” with a long way to go. Fawcett, however, is confident that the board can succeed in its mission for standardisation and regulation, as the industry is set to become much simpler in light of the Madoff scandal. There will be fewer intermediaries and more one-on-one contact between fund managers, financial advisors and investors.
What’s more, Antonio Borges, chairman of the HFSB believes that hedge funds will remain resilient and profitable for the duration of the recession. Borges says that hedge funds have “behaved responsibly” during the crisis and that they have proven their value with relatively low losses when compared to other sectors in the market. He adds, however, that survival will mirror the Darwinian Model – only the strong will survive.