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相比正常的零售基金，他们用另类投资策略，只能由合格的投资者购买，有更高的风险暴露等，直到最近，大多数对冲基金都有优势，能够对任何金融监管制度框架以外的工作。然而，由于金融危机，对冲基金持有部分责任，更严格的监管往往是要求。本文将考虑制定投资规则的利弊，分析了最近的法律建议，如何对冲基金可能会对这些新规则的反应和自我调节的可能性。
Hedge funds and regulation: a possible marriage?
Hedge funds have always been a rather curious case in the mutual fund market. Compared to normal retail funds, they use alternative investment strategies, can only be bought by qualified investors, have a higher risk exposure etc. Furthermore, until recently, most hedge funds have had the advantage of being able to work outside the framework of any financial regulatory system. However, since the financial crisis, to which hedge funds are held partially responsible for, more stringent regulation is often demanded. This paper will consider the advantages and disadvantages of elaborate investment rules, analyze the recent law proposals, how hedge funds may react against these new rules and the possibility of self-regulation.
Why should hedge funds be regulated?
Destabilizing An often heard preconceived opinion about the hedge fund industry is that it would destabilize the whole financial system and so the whole economy. When they refer to macro hedge funds, which profit from macroeconomic developments, they are correct. However, in general, empirical evidence on this topic is mixed. So regulating the hedge funds for destabilizing reasons would be a bit severe.
Overly leveraged Excessively levered investment vehicles pose a potential threat to the financial markets. The failure of LTCM in 1998 illustrates this perfectly. Looking at Hedge funds, we see that they do not have a limited leverage ratio, unlike other financial institutions. So we could conclude that they form a big threat. However, statistics (a study completed by TABB Group in 2005) show that in 2005 over half of the hedge funds had a 2:1 ratio (i.e., $1 of equity for every $3 of asset value), in contrast: commercial banks average about 10:1. So the call for extra regulation because of this false reason is wrong.
Consumer Protection Last decade hedge funds were only accessible for institutional investors. However, recently the general public got more acquainted with hedge funds, too. This amplified the call for more regulation.
Fraud Protecting investors from fraud will always pose to be a major problem in every unregulated financial sector. Insider trading, a lack of transparency, asymmetric information and falsification of past returns are a big threat for the hedge fund industry. These threats should lead to a more stringent regulation.
Current financial crisis Like every household in the economy, hedge funds have played their part in the 2007-2009 financial crisis. When the prices started to plummet on the stock markets, hedge funds used the technique of short selling to have consistent gains, which lead to bigger price drops. They also had to give up some of their investments because investors in hedge funds, who lost their faith, gave up their partnership. However, hedge funds not only have amplified the crisis, probably they are also reducing it. They are doing this by daring to take risks during the crisis when almost no other counterparty can be found. To conclude: the ongoing financial crisis would be a bogus argument to regulate the hedge funds more stringent.
Systemic risk The idea that a failure of one or more financial institutions could start a chain of correlated defaults and thereby menacing the whole financial system is called ‘systemic risk' (Chan et al., 2005). In our context a financial institution would be a hedge fund. Based on these grounds, the government could regulate hedge funds more stringently. However when we look closely we'll find that doing such a thing would be wrong. Researchers agree on the fact that there are two transmission channels through which a shock may be transferred (Ferrari, 2009). In the first transmission channel, financial institutions play an important role. These institutions give credit to hedge funds, which makes them directly exposed to shocks from hedge funds. The second transmission channel is due to hedge funds that play an important role as counterparty on the financial markets. Now that we know that there are two transmission channels, it seems more obvious, easier (especially for the first transmission channel) to regulate the other side, i.e. the other financial institutions.
How should hedge funds be regulated?
Self-regulation
In the past several years, financial governments have tried to regulate the hedge fund industry. Their attempts were in vain because hedge fund managers always found loopholes in the new regulations. In response, many regulators have proposed to install a system of self-regulation. Although this proceeded the current financial crisis, it is worthwhile to examine this type of regulation. To most people, the benefits of such a system outweigh the disadvantages when well implemented. Focusing on the benefits, a substantial argument in favour is its capability to react rapidly to industry changes. This responsiveness is very appreciated in the fast changing financial markets. In addition to this speed and flexibility, self-regulation also has the capability to be cross-border and very efficient. However, research has shown (Ferrari, 2009) that self-regulatory organizations seem to prioritize regulations recently drawn attention to by the government. This significantly reduces the advantage of quickness. In addition, this system of self-regulation will always seem to have a glare of ineffectualness (Mackintosh, 2008). We can conclude that a self-regulatory system on its own is not beneficial; however, when supported by a government-based regulatory system it could serve as a sound alternative for an over-regulatory government policy.
In this section, we will focus on the recent EU and US regulation proposals that impose on a more stringent regulation of hedge funds.
In March 2010, EU finance ministers were close to reaching a deal regarding the “Alternative Investment Fund Managers Directive”. This directive, diverged from G20 meetings, would affect all significant EU hedge funds and implies a.o. regulation of all sources of risk, enhanced transparency (towards supervisors, investors and other key stakeholders), governance standards and robust systems for the management of risks, liquidity and conflicts of interest. Although Gordon Brown recently managed to drop this directive from the EU agenda, a new compromise deal is expected before the end of the year.
In the US, the “Restoring American Financial Stability Act of 2010” should provide the regulatory framework for the financial sector in the post-crisis era. In particular, this act will force hedge funds to register with the SEC, and provide information about their trades and portfolio, necessary to measure systemic risk. The Volcker Rule, another part of the Financial Stability Act, will require banks and Bank Holding Companies (BHCs) to diverge their investments in hedge funds and will limit BHC relationships and transactions with hedge funds.
How may hedge funds react
It surely is difficult to forecast how hedge funds may react on more severe regulation; logically they will do what is in their best interest. In the past, financial institutions have already proven how inventive they were and will be to avoid such regulations. In addition we shouldn't fail to forget the sheer lobbying force, which will try and prevent any form of regulation.
Since new regulations are about to be voted in the EU Parliament, some hedge funds have already decided to move offshore; it is expected that more will follow (Matthew Lynn, 2009). This would cause a significant loss of tax revenues for London, where most European hedge funds are situated, which helps to explain why London is rather against stringent regulation.
In contrary to the original idea, regulation could lead to hedge funds taking more risk; i.e. increased direct regulation could entail moral hazard behaviour. Consequently systemic risk wouldn't be reduced, but unintentionally increased, caused by a false feeling of security in the financial markets (M. R. King, P. Maier, 2009).
Conclusion 结论
Having faced the consequences of the financial crisis, anyone would agree that a new regulatory framework for hedge funds is imperative. Increased concerns about consumer protection, the hedge fund leverage and the systemic risk they could impose, are often cited reasons as to why the EU and US have launched new law proposals. However, one could question whether these proposals overlook the possibility of self-regulation. Moreover, severe regulation could lose its effectiveness, as hedge funds are likely to relocate.
In summary; hedge fund regulation is an important, but complicated issue. Undoubtedly, more law proposals, discussions, and lobbying will ensue.
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