| The FSA won't meddle with hedge funds, but will keep tab on them |
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| 03/07/2005 | |
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UK's financial regulator, the Financial Services Authority (FSA), has published a discussion paper in which it says that it will take more interest in the development of hedge funds, but that it will make sure not to disrupt this widely lucrative industry for the City. This could result in some changes as to how the FSA engages with the hedge fund industry in the future, once the feedback on the paper is collected from the interested parties. "In opening this discussion we are mindful of the danger of regulatory arbitrage and have no desire to cause the hedge fund management industry to migrate to more lightly regulated offshore centres as a result of regulatory action", insisted Hector Sants, FSA Wholesale markets and institutions Managing director. At the agency level, one of the most visible measure will be the creation of a centre of hedge fund expertise within the FSA's wholesale markets business unit, which will concentrate the regulator's hedge fund resources within a single unit to keep track of hedge funds more efficiently. Risks The FSA is also seeking feedback on other potential risk mitigation actions it might take. Further on, it could distinguish hedge fund managers more clearly from other types of discretionary investment managers/advisors for the purposes of regulatory oversight. The regulatory agency also proposes to collect additional data, based upon existing management data, from hedge fund managers to support enhanced supervisory oversight of high impact firms and the accurate targeting of additional thematic reviews. In its discussion paper, the FSA weighs the likelihood that hedge fund fee structures may encourage pension fund consultants to oversell investment in hedge funds. "These fees structures could also encourage mixed traditional/hedge fund management firms to inappropriately favour the hedge funds when placing or allocating deals", says the FSA. Broadly speaking, the most serious risk identified by the FSA would be a serious market disruption and the following erosion of confidence as a result of the failure or significant distress caused by the failure of one large hedge fund or of a cluster of smaller funds. According to the regulator, liquidity disruptions on the markets due to a liquidity mismatch caused by the illiquid investments made by some hedge funds and the ability of their investors to withdraw their money more quickly are also foreseeable. J.L. |
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