More transparency in hedge funds?

The announcement last week at the IOSCO conference of a new investigation by regulators into hedge funds and their transparency – or lack of it, will no doubt be welcomed by investor relations officers. Anything that achieves more insight into the holdings, strategies and practices of these often aggressive super sized investors is to be welcomed. The question remains as to whether this will be achieved, and if it does, won’t it simply drive the hedge funds offshore?.

First, some background. The earliest hedge funds, created more than a half-century ago, were actually formed to hedge against risk. There was a small group of investors with a big pool of money, which was leveraged and then invested in equities in both long and short positions. By shorting stocks, managers could cushion the portfolio if the market dropped, while still reaping gains elsewhere when it rose. Today, an estimated 8,000 hedge funds manage $1 trillion in assets, mostly for wealthy investors and institutions. Hedge funds tend to be more risky than mutual funds, because they bet on falling as well as rising securities.

And they can be more opaque as well. "Hedge funds remain opaque," Roel Campos, one of the SEC's five commissioners, said in an interview. "We need to rationalise what informational needs are necessary before any international coordination on regulation, if regulation is needed."

Current scandals involving the Bayou Group in Connecticut and the KL Group in Florida, in which scores of millions of dollars are unaccounted for, haven't eased concerns.

Traditionally, hedge funds have enjoyed a freedom from regulation, a “can’t touch me” status. That lack of regulation and transparency has been an accepted part of the equation for both investors and federal regulators, but times are changing. An explosion in the number of hedge funds and in the money pouring into them has increased anxiety about their potential risk.

These concerns have led to the announcement last week of a new study to be conducted by International Organisation of Securities Commissions (IOSCO), a global body for financial market regulators. The study will take a different direction from previous work by regulators, in 2 ways. Firstly, other studies have examined the systemic and market risks posed by hedge funds, without examining their internal control procedures. Second, the study is being conducted by a global regulatory body. Working in isolation, national regulators will achieve nothing, because of the global nature of the business.
Whether this new study leads to new regulation – and to new transparency for hedge funds – remains to be seen. However, for IR professionals seeking a greater visibility of beneficial ownership in their share register, it holds light at the end of a long tunnel.