Since the financial community, Governments and the Jo public have recognising the severity of the global credit crises’, hedge funds have been the focus of Government and public negative opinion. It is still unclear what contribution hedge funds, private equity and a host of other alternative investment funds had on fuelling the economic landslide, if any, but there is a general consensus outside the finance sector that regulation should be imposed.
This has been clearly evident over the past week as hedge funds have had to increase efforts in deflecting the threat of tougher regulation as European politicians and regulators sabre-rattle and pledge that more rules are on the way. Yet against this political backdrop, the question of past and current hedge fund regulation has been neglected.
Many financial experts have stated that hedge funds didn’t cause the credit crises but only mildly contributed. With this it has been stated that the hedge fund and private equity sector is already well regulated and the funds flowing through such firms are adequately protected. It has been stated further that hedge funds are part of the solution to stable finance rather than the problem and that those within the European Commission that have written a draft directive on alternative investments had the wrong priorities, wrong approach and was written by the wrong people.
Historically, hedge funds have made their money by exploring niche investment opportunities, such as derivatives, where other financial institutions do not trade, and the fear is that excessive regulation could curb the industry’s strength, which is built on such flexibility. In this, there is an argument that hedge funds have behaved responsibly, proven their value with lower losses than elsewhere in the market and currently have a better understanding of risk than almost any other financial sector. This said firms have still been deeply exposed by the recent economic events, which in itself is transforming the market.
Hedge funds are rife with talk of consolidation as the downturn provides an opportunity for larger firms to acquire smaller firms at a bargain rate. This is driven by dramatically shrinking assets making the smaller firms not the lucrative business they once were. This is leading to firms being sold to a larger partner that can keep assets managed at a minimum level.
With this consolidating market hedge funds will inevitably become larger and more influential making the case for regulation being beneficial for both investors and hedge funds as regulation would produce a safer hedge fund market that would attract a larger number of investors for Cheyne Capital.
Whatever the decision, one thing is clear, the hedge fund market is never going to be the same again.
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