As part of its ongoing inquiry into the banking crisis, last
month the Treasury Select Committee invited some of the UK's
top hedge fund managers to give evidence. Witnesses on the panel
included Paul Marshall, chairman of Marshall Wallace; Chris Hohn,
managing partner of The Children's Investment Fund; Douglas
Shaw, managing director of BlackRock; and Stephen Zimmerman, chief
executive of NewSmith Asset Management. Andrew Baker, CEO of the
Alternative Investment Management Association (AIMA) was also in
attendance. Antonio Borges, chairman of the Hedge Fund Standards
Board (HFSB), appeared on a subsequent panel at the same
inquiry.
Many of the witnesses faced hostile questioning from MPs. Much of
the criticism focused on the industry's attempts to regulate
itself. In particular, the Committee asked why only 34 firms had
signed up to the Hedge Fund Standards Board standards, out of total
of more than 400 UK-managed hedge fund firms. Responding, Antonio
Borges said that initially the HFSB had hoped to sign up 10 new
members each month but that the process had "slowed down"
since the onset of the financial crisis with many firms focused
purely on "survival." Only a "small number" of
funds, said Borges, were not interested in signing up, with 120
funds approached so far. The HFSB was also attacked for operating
on a "comply or explain" basis rather than binding
sanctions. On this point, Borges explained the "whole
purpose" of the regime was to give investors greater
information so they could exercise due diligence and monitor for
themselves whether the standards were being met. Borges also
explained that the FSA would be taking the HFSB standards into
account when making its supervisory judgments.
Another chief target of the Committee was short-selling. All hedge
fund managers at the hearing defended short-selling as an integral
part of hedge fund management and criticised the recent
short-selling ban in financial stocks. In particular, Paul Marshall
quoted research from the London Stock Exchange, showing that the
effect of the short sale ban had been to reduce liquidity in these
stocks, increase transaction costs and increase volatility. While
opposing the ban, most agreed that some form of short-selling
disclosure was necessary but argued that this should be on an
aggregate basis rather than an individual basis (individual
positions would be disclosed to the regulator but would not be made
public). There was also agreement that hedge funds should not
engage in "naked" short-selling - where stocks are sold
without being borrowed beforehand to cover the position.
When pressed by the Committee on the performance of the UK's
current regulatory hedge fund regime, the panel maintained that the
existing regime was working well; with several pointing out
differences between UK regulation and its US counterpart, where
less than 50% of hedge fund managers are registered with the
Securities Exchange Commission. "One of the things I am keen
to get across," said Paul Marshall, "is that the UK has a
very good regulatory regime for hedge funds and it is different
from the regime in the United States. When asked by Committee
Chairman John McFall on whether the UK's regulatory system
would prevent a Madoff-type scandal, Douglas Shaw argued that UK
regulation has been much more successful in preventing fraud than
other regulators. According to Shaw, of the 67 reported cases of
hedge fund fraud, all of them had occurred in the United
States.
With most UK hedge funds domiciled offshore, members of the
Committee wondered what implications this had for investor
protection. Responding for the AIMA, Andrew Baker explained that
the FSA "cannot influence what happens to the funds in an
offshore jurisdiction in terms of direct investor protection."
The primary purpose of UK regulation, said Baker was not investor
protection but to "raise the standards of investment practice
by managers and ensure that systemic issues do not
arise."
To view the Treasury committee hearing, click here.
To read the full transcript of the hearing (uncorrected version),
click here.
To read the HFSB's written evidence, click here.
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