Quarta-feira, 5 de Março de 2008

Sector financeiro: a regulação dos "hedge funds"

Financial Times, March 5 2008

Hedge funds present dilemma for regulators

By James Mackintosh

Published: March 5 2008 01:16 | Last updated: March 5 2008 01:16

A Canadian chief, operating out of London, living in Germany, using a Swiss lawyer to defend against accusations by a US regulator that companies based in Caribbean tax havens fraudulently raised more than $300m – welcome to the global hedge fund industry.

Lake Shore Asset Management, run by Philip Baker, stands accused by the US Commodity Futures Trading Commission of misappropriating $11m from investors after raising cash on false pretences. It denies the claims.

Such international operations show how hard it is to regulate hedge funds, nimble and typically offshore investment vehicles run by some of the smartest people in the world for the benefit mainly of the richest.

Regulators have been grappling with hedge funds since 1998, when the collapse of Long-Term Capital Management, then one of the biggest hedge funds, almost brought down the financial system.

One conclusion has been that hedge funds with few restrictions on what they can do are generally a good thing, making markets more efficient and adding liquidity – as long as they do not blow up or steal investors’ money.

“Hedge funds operate in the shadows, and they have to, they can’t publicise everything they do,” said one US regulator.

Yet, there is a dilemma for regulators. If they get too heavy with hedge funds, agile managers can quickly uproot themselves and move to a more friendly jurisdiction. If they do too little, they run the risk that a repeat of LTCM could bring down a bank, or that managers could rip off investors.

Bradley Ziff, head of global hedge fund advisory at Oliver Wyman, said: “The implication is that if the regulatory regime in either the US or UK were to get sufficiently unfriendly then it is clear to regulators that hedge funds – unlike a bank – could move their trading operations offshore.”

The latest attempted solution to this problem is to use voluntary codes.

A British code – supported by the 14 largest managers in London – is due to take effect at the end of the year.

Big US funds and investors, pulled together by the President’s Working Group on Financial Markets, are expected to publish their own guidelines in weeks.

Regulators are also working together far more closely than in the past in an effort to detect crime.

Gregory Mocek, director of the CFTC’s enforcement division, says the increased co-operation helps offset the extra difficulties that stem from hedge funds being likely to operate in several countries.

“Any time you have two jurisdictions involved and different legal standards with an ocean in between, there are more complications,” he said. “However, over the past 10 years, as the world has shrunk and the sharing of information has increased, we are better suited today to pursue international fraud.”

Yet, regulation remains fragmented. It ranges from almost nothing, for managers and funds based in tax havens, to full scrutiny by the main financial regulator in London and much of Europe.

In the US, the CFTC oversees futures traders, and other managers can choose to be regulated by the Securities and Exchange Commission. A large minority have opted not to register, although the biggest have no choice: managers with more than 14 funds are forced to register.

Underlying the question of how to regulate are the two reasons for regulation, which do not always pull in the same direction: protecting investors and protecting the financial system.

In every jurisdiction regulators have the power to protect investors from outright fraud or insider trading, whether committed by a hedge fund manager or anyone else. However, investor protection tends to be left to the principle of caveat emptor – investors put money in at their own risk.

Hence the rules in many countries allowing only wealthy and institutional investors – able to afford proper due diligence – to put their money into hedge funds, or to be approached by salesmen.

On the other side is protection against systemic risk, the danger that a hedge fund collapse brings down a bank or kicks off a domino effect across the financial system.

It was ostensibly to prevent such knock-on effects that Germany suggested last year a global database of hedge fund holdings, allowing regulators to see exactly what risks they are running.

Yet, almost all regulators argue it is more practical to prevent uncontrolled risk-taking by keeping a close eye on the banks that lend to hedge funds, rather than regulating the hedge funds.

The Government Accountability Office in the US reported to Congress last month that there could be dangers from indirect regulation because big hedge funds have more than one prime broker, meaning no one bank sees a fund’s total leverage.

Still, during the current credit crisis it has become clear that the highly regulated banks were taking huge risks themselves, leaving them with far bigger subprime losses than the lightly regulated hedge funds. As one hedge fund manager jokes, perhaps the funds should keep an eye on the financial stability of the banks.

Back at Lake Shore, it is ironic that it was the fund’s launch of a website with increased transparency that started its run-in with the CFTC, whose inspectors had their passwords revoked when they raised concerns.

Lake Shore now stands accused of fabricating returns to attract investors, although it claims it cannot hand over details of customers to the watchdog because of another international legal issue: bank secrecy laws.


Political foil to a heavy hand

The decision by the Managed Funds Association, the trade association for the biggest US-based hedge funds, to hire a senior politician as its chief executive underscores the industry’s fear of heavy-handed regulation.

Richard Baker, who quit as Republican Congressman for Louisiana to take the job last month, says the MFA recognises it needs better relations with politicians as the industry becomes increasingly important.

“Growth in the size and number of funds has meant it is no longer realistic for them to hide under a rock in the economic pasture,” he said. “There is no rock large enough to cover them all.”

But that does not mean hedge funds will quietly acquiesce to new rules. On the contrary: Mr Baker’s brief is to ensure the funds stay out of the clutches of watchdogs.

It is, he insists, completely wrong to say hedge funds are lightly regulated, given the power their investors and bankers have over them.

“You have a vice of regulatory constraint,” he says. “One from the investor side and one from the lender side.”

Mr Baker recognises the political imperative to protect small investors, one reason the MFA is supportive of efforts by the Securities and Exchange Commission to increase the minimum wealth investors need to be eligible to invest in hedge funds.

But he says it is vital to avoid restrictive rules, which would interfere with the flexibility of the sector to come up with new and creative ways to invest.

“There are many, many ways of seeking out inefficiencies in the market and seeking financial reward,” he says. “We should not artificially constrain the model without evidence that it is bringing harm.”

The question is whether his former colleagues in Congress can be persuaded to agree with him.


publicado por MMP às 17:41
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