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December 2009

Regulating social networking

December 18, 2009 by nikpratt   Comments (0)

Regulating the use of social networking may seem as easy as herding cats or boiling an ocean but FX brokers in the US may have to follow a series of compliance measures if the National Futures Association (NFA) gets its wish. The NFA, the watchdog for the US commodities and futures market, has proposed a series of rules to regulate the use of social networking for investment purposes. http://www.docstoc.com/docs/document-preview.aspx?doc_id=19495361

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Is hedge fund regulation a contradiction in terms?

December 14, 2009 by nikpratt   Comments (0)

The Alternative Investment Managers Association (AIMA) last month stated its support for the US proposal to have all hedge fund managers operating in the US register with the SEC. As AIMA chairman Todd Groome said: “Our industry recognises the need to constructively support efforts to improve financial stability analysis and has worked with US authorities in this regard for many years.”

Meanwhile, in the UK, the Association of British Insurers is the latest body to speak out about proposed EU legislation for the hedge fund industry, warning that the EU was in danger of throwing the baby out with the bathwater. “Those who invest in financial markets on behalf of European savers need to be able to make sensible decisions within a well-regulated global market and not, as proposed, be excluded from key markets,” said Peter Montagnon, director of investment affairs at the ABI.

In some ways it is a bizarre situation to have AIMA, the trade association that lobbies on behalf of the hedge fund industry, supporting regulation, while the ABI, a supporter of shareholder activism and protector of institutional investors, argues against regulation. But then such a conclusion is disingenuous to a degree.

AIMA is simply supporting the decision to introduce mandatory registration for hedge fund managers in the hope that this will root out the less scrupulous managers that are tarnishing the industry’s reputation. Meanwhile the ABI is arguing that any EU measures should not penalise potential investors but should instead strengthen the rules around those managers they chose to invest with.   

But these opinions do encapsulate the dilemma that lies in hedge fund regulation. To many, it is a contradiction in terms. Hedge funds by definition should be unregulated investment vehicles, able to traverse through the cracks of the supervisory system in some kind of financial freestyle. And if a two man team in Mayfair has an investment idea and a list of ten filthy rich friends, then who are the regulators to interfere.

But alternative strategies have become so pervasive and the term ‘hedge fund’ is now so nebulous that definitions are as much a statement of opinion as they are fact. Marshall and Wace, for example, may still have its head office on the top floor of the Adelphi hotel but it has $15 billion under management. Is it still a hedge fund?

And if a hedge fund is defined by its strategy, there are very few traditional asset managers that do not have an alternative arm of some description. Similarly the nature of the investors has changed with institutional rather than private capital making up a far larger percentage of the trillions managed by the hedge fund industry than in previous times.

So, if the hedge fund industry is to return to an era of private investors, then regulation will be largely pointless and unwelcome. However, if the institutional input is to remain, which it surely is, then the underlying investors – the pensioners that Mr Montagnon talks of – need to be protected. And that means regulation of some sorts, even if it is the simple act of registering with the market regulator. And who could argue with that?

It reminds me of an old landlord I had when I was a student. He would let himself into the house, unannounced, on a regular basis. And when we would respectfully ask him to abide by the terms of the contract and give us 24 hours notice, he would reply: “Why? What are you doing you shouldn’t be?” And I think the same thing applies here.

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