24/02/2010
Author: Andrew Baker
Comment: Andrew Baker
It is exactly a year since we placed the principle of transparency at the heart of our response to the financial crisis. The Aima Policy Platform, released in February 2009, endorsed a number of
measures including manager registration and the periodic reporting by larger managers to supervisors of systemically relevant information. These principles are now widely recognised as the best way
forward.
The concern of international policymakers since the crisis has been that they have insufficient information about the build-up of systemic risks in financial markets. Our response, on behalf of the
industry, has been to offer our full co-operation in contributing to structures that will supply them with the timely, relevant information which they need to assess financial stability issues. We
have been working with national and supranational authorities to develop a supervisory framework. The very largest managers can contribute to financial stability analysis by providing authorities
with systemically relevant information, such as portfolio or balance sheet concentrations, volatility levels across markets, liquidity conditions and leverage levels.
It should be noted that many of the largest hedge fund managers have for many years been voluntarily sharing market and risk management information with national and international authorities. But
requiring possibly hundreds of managers to supply such data is not a simple task. We need to balance providing the right amount of information with avoiding overburdening the industry and its
supervisors. The data gathered needs to be relevant to the risks we seek to mitigate, and it must be understood that neither the public nor the private sector can draw on infinite resources. The
effort will be worthwhile if it creates a structure that enables the authorities to manage systemic risk and to avoid market disruption.
Transparency is at the heart not only of the industry’s approach towards supervision but also its relationship with investors. It is right, given the increasing maturity and sophistication of
the industry and with the increasing investment in the industry by institutional investors, that greater transparency is being offered by managers and sought by investors.
Institutional investors are sophisticated and increasingly influential. Research last year by Aima indicated that they account for an absolute majority of AuM by the industry, ending the era of
high-net-worth individuals as hedge funds’ most common investor type. An indication of the growing trend of institutional prominence came from Agecroft Partners, which recently estimated that
the average US pension fund would increase allocations to hedge funds from a current level of 2.5% to around 15% by 2020.
This is a testimony to the success of the industry, not least in terms of offering more control over the risk/return trade-off compared to other asset classes. Indeed, when the trustees of the
Royal Dutch Shell pension fund announced plans to allocate more assets to hedge funds, they made a point of saying they wanted to diversify away from more volatile assets.
There is an alignment of interests between investor and manager in our industry that promotes sustainable and successful investment. This bond between managers and investors has been strengthened
through adversity, as seen during the campaign for revisions to the current form of the Alternative Investment Fund Managers (AIFM) Directive, which has been fought as strenuously by investors as
by alternative investment managers themselves.
Pension funds and other investors desire regulation that delivers the investor protections they seek as well as promotes financial stability. With managers once again receiving net inflows and with
returns at their best levels for a decade, more transparency between managers, investors and supervisors will allow us to look forward to the future with confidence
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