German Central Bankers: Beware Hedge Funds
Lipper HedgeWorld.com, December 2006
BONN, Germany (HedgeWorld.com)—The
Bundesbank has published its annual financial
stability review, and has included surprisingly
strong words of caution about the hedge fund
industry and its possible deleterious effects on
the economy of Germany in particular.
"The behavior and
resilience of major market participants play a
key role in the market's dynamics," the report
stated. "Disruptive effects might be generated
by hedge funds, whose major presence in some
market segments has a considerable impact on
The report stated
that present macroeconomic trends are positive,
and this has limited the broader damage that "misspeculations"
by hedge funds have caused. But that won't
always be the case, the report warned, and
"market reversals might be intensified" by
correlated investment patterns among such funds.
These words drew
an immediate rebuke from the Alternative
Investment Management Association, which said in
a statement Wednesday [Nov. 29] that the
comments were unfounded for a variety of
managers, and in some cases the funds proper,
are regulated throughout Europe, and their
standard of governance is high;
Hedge funds are also subject to the market
discipline enforced by counterparties such as
prime brokers; and the growth of institutional investment in
hedge funds has brought higher levels of due
Both the Bundesbank's report
and the AIMA's response alluded to the blowup of
Amaranth Advisors LLP, New York, which lost
nearly 70% of its asset value due to misguided
bets on energy prices (previous hedge World
story). The AIMA statement said that the
financial system had absorbed the impact of this
event, and that at any rate "the European hedge
fund industry has not experienced such an
This is only the second year
that the financial stability report has been
published by the Bundesbank as a separate
document. Two previous reviews of the issue of
stability (in October 2004 and in December 2003)
had been published as chapters within the
respective monthly reports.
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FSA urges more price transparency on hedge
Published in reuters.com, November 2006
LONDON (Reuters) - The Financial Services
Authority (FSA) has recommended measures to make the hedge fund
industry more open and transparent at a time when regulators
have been stepping up scrutiny of the sector.
The watchdog is urging fund managers to spell
out policies on pricing the instruments used in their funds and
disclose these policies to firms such as prime brokers, the FSA
said in a letter to the International Organisation of Securities
Fund managers should have procedures for the
day-to-day operation of a pricing process and these should be
updated if a manager adopts instruments that are markedly
different from those in an existing fund, the FSA letter, which
was published by the FSA on Wednesday, said.
IOSCO is working on standards on the valuation
process in the hedge fund industry and is due to complete this
work by April next year.
The FSA visited a number of managers at hedge
funds between March and May this year, as well as administrators
and other groups.
The global hedge fund industry is estimated to
hold up to $1.7 trillion (870 billion pounds) in assets with the
bulk of funds registered in offshore locations like the Cayman
Hedge funds use instruments like derivatives
and techniques such as leverage and short-selling to make
returns. Regulators have been scrutinising the sector to ensure
it does not pose significant risk to the financial system.
In early November, senior members of the U.S.
congress told Reuters that the hedge fund industry is likely to
come under scrutiny from lawmakers soon.
The chief executive of hedge fund company Man
Group, Stanley Fink, told an IOSCO meeting earlier this month
that he welcomed moves to improve transparency in the industry.
Reuters 2006. All Rights Reserved.
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