GFT UK Managing Director, Graham Underwood, explained, saying, âsix months ago the FSA announced that hedge funds would face greater regulatory controls as it detected complacency towards risk in the industry. At the same time, the influential US GAO report on use of multiple prime brokers highlighted the lack of transparency in evaluating overall credit and counterparty risk. Then, in February the banks found themselves in the previously unheard of position of being grilled by hedge fund managers about their exposure and risk levels. And today, we are seeing combined pressure from investors and lenders, which is driving hedge funds towards a greater focus on housekeepingâ.
GFT UK recognises that hedge funds have always been notoriously difficult to pin down; nimble and agile institutions, they can just up sticks if the regulatory climate doesnât suit them. Already recognised as a hub for hedge funds, London is unlikely to want to turn up the heat enough to make life uncomfortable, but as winter turns into spring, guidelines and voluntary codes will abound.
The company also believes that, aside from regulation, pure commercial pressures are driving hedge fund managers and their brokers towards more efficient and transparent operating models. A number of leading hedge funds may have to survive 2008 on management fees alone as consistent out-performance of benchmarks becomes more elusive. The focus on value-for-money is also driving the unbundling of Prime Broker services as Hedge Funds own operational models evolve.
Investors, lenders and the markets will all be putting pressure on hedge funds this year, but regulation is likely to be much further down the list.