Hedge Funds say Keen to Comply as Lawmakers Probe

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Hedge Funds say Keen to Comply as Lawmakers Probe
By Reuters
Tuesday, January 27, 2009 2:22:02 PM ET

LONDON (Reuters)—Top hedge fund executives on Tuesday [Jan. 27] laid out plans to shed more light on their secretive industry as they face a barrage of criticism from lawmakers over the slow take-up of voluntary governance standards.

Executives in two high-profile Treasury Select Committee meetings on the banking crisis proposed formal and coordinated disclosure to regulators via their prime brokers, as well as limits on borrowings. The meetings—which heard from media-shy Christopher Hohn, founder of The Children's Investment Fund, and Marshall Wace chairman Paul Marshall—come as the industry faces widespread criticism on its role in short-selling banking shares.

"There is a view that what the industry is really doing is snubbing the public and not just that, but you're making shedloads of money out of taxpayers at a time when every single penny that taxpayers put into institutions should be preserved," said Committee chairman John McFall.

Fears that a major fund collapse could trigger a market crisis like that after the fall of Long-Term Capital Management in 1998 have spread after an alleged $50 billion fraud by U.S. financier Bernard Madoff. Controversy has also grown about the practice of short-selling, which was blamed by some politicians for exacerbating the banking crisis and which was temporarily banned in financial stocks in the United Kingdom.

A regulatory filing on Monday [Jan. 26] showed U.S. hedge fund firm Paulson & Co. made a profit of at least £90 million ($127 million), and could have made as much as £270 million, betting on a fall in Royal Bank of Scotland shares.

Lift the Lid

Industry participants showed signs they were willing to give more information about an industry traditionally known for its lack of transparency, for instance by providing global data obtained through prime brokerages.

"We could move to a more formal process of aggregating data through the prime broker to provide that information to the regulator, and to coordinate that at a global level," Marshall Wace's Mr. Marshall told the hearing.

Mr. Marshall also said he welcomed work being done on whether "special types of leverage limits" could be used for isolated cases of funds with very high borrowings. "If there can be agreement between the U.S. and U.K. authorities about what is the information to be gathered to prevent systemic risk, and how to gather it, then hedge funds stand ready and willing to provide what is asked for," said Andrew Baker, chief executive of the Alternative Investment Management Association.

Pressure

But lawmakers put pressure on the sector for the low number of fund managers that had signed up to the Hedge Fund Standards Board's best practice standards on disclosure and governance, designed to stave off formal regulation.

"We felt it [the Hedge Fund Standards Board] was a weak industry body and that there's quite a long way to go there," Committee Chairman Mr. McFall said.

In December, the HFSB said 33 firms in total had signed up out of around 400 to 450 firms in the U.K. In terms of assets, the HFSB represents about half the industry in Europe.

"That's a dangerous snub to the public and to the authorities from your industry," said Committee member George Mudie. "You've attracted 20 fresh members in a year. If I was a trade union officer on recruitment I'd be sacked."

HFSB Chairman Antonio Borges said such a code would make a scandal similar to Mr. Madoff's alleged Ponzi scheme impossible, and that most firms it had contacted about the idea were "interested."

"If our standards existed in the U.S., Madoff could not have happened," he said, although he added guidelines on hedge fund administration could be toughened up in the wake of the scandal.

TCI's Mr. Hohn came under attack for TCI's role in the sale of Dutch bank ABN AMRO, where TCI criticized the firm's "terrible shareholder returns" and called for it to look at options including a break-up or sale.

ABN was later sold to a consortium led by Royal Bank of Scotland, which itself is now 70% owned by the U.K. government.

"ABN has ended up with the British taxpayer," said one committee member. "Pray for us."

By Laurence Fletcher, with additional reporting by Steve Slater and Joel Dimmock

Laurence.Fletcher@ThomsonReuters.com