A leading hedge fund executive has encouraged the industry to pre-empt legislators and adopt their own best practice, as G7 finance ministers prepare today to discuss financial sector stability and transparency. Sir Andrew Large, formerly one of Britain’s most senior financial regulators, told Emerging Markets that many funds already share information on their risk exposure confidentially with central banks and regulators.
Large, chairman of the listed MW Tops hedge fund managed by Marshall Wace said: “If the industry can show the way forward, it will lessen the need for regulatory action.”
Framing legislation to reinforce the sector’s stability, without inhibiting its operations, is “not an easy thing to do”, he added. Proposals on voluntary standards by the Hedge Fund Working Group, chaired by Large, were published for consultation last week. They are intended to “explain how hedge funds operate in the global economy so as to instil confidence in the high quality that the industry aspires to”.
The Working Group was set up after several high-profile hedge fund failures during the summer credit crunch, which prompted concerns about poor risk management and disclosure in the industry.
Its proposals include setting industry-wide standards for liquidity risk management, and valuing complex structured assets, as well as greater public disclosure of assets. But former UK hedge fund regulator Andrew Shrimpton has raised doubts about the need for greater disclosure.
“If investors, or the banks extending credit lines to the funds, ask for this information, they would receive it in confidence”, Shrimpton, until this year UK Financial Services Authority’s alternative investment head, told Emerging Markets. “During the bull market, they became lazy and did not do the due diligence on the funds.”
Shrimpton, now senior compliance advisor at Kinetic Partners, a hedge fund, also warned that too much public transparency could provoke volatility, as traders attempt to respond to perceived changes in positioning by major hedge funds.
Large acknowledged that some practitioners had expressed concerns about disclosing exposure information to their creditors and prime brokerages. “There is an historic tension between lending institutions and their counterparts,” he added. “It involves the transparency of information, because prime brokers especially might use the information against the hedge funds in their own trading strategies.” But he added it was worthwhile setting an example. “We want to be able to say to them ‘here are the best practice standards, over to you’.”