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Aima launches transparency initiative designed to counter systemic risk

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Hedge fund industry trade body the Alternative Investment Management Association has announced that it will support the principle of full transparency and supervisory disclosure of systemi

Hedge fund industry trade body the Alternative Investment Management Association has announced that it will support the principle of full transparency and supervisory disclosure of systemically significant positions and risk exposures by hedge fund managers to the national regulator in the jurisdiction where they are registered and authorised.

According to Aima chief executive Andrew Baker, the initiative is part of the organisation’s contribution to the global debate on the future of hedge fund regulation and, it is hoped, will help to head off less considered actions that in clamping down on the activities of hedge funds, might cause wider damage of the international financial system.

Founded in 1990, Aima has more than 1,200 corporate members in 43 countries including hedge fund managers, fund of hedge funds managers, prime brokers, providers of legal and accounting services and fund administrators.

Baker says Aima is keen to dispel any suggestion that the hedge fund industry is opaque and unco-operative, but instead seeks a uniform and coherent global regulatory framework that allows managers to operate freely while providing reassurance that the industry is adequately supervised and that risks to the global financial system are adequately monitored.

‘We are confident that our members recognise that it is in everyone’s best interests if we co-operate fully in the important ongoing international efforts to examine and improve the supervisory framework of the future,’ he says.

The association’s policy platform new platform also includes an aggregated short position disclosure regime to national regulators – as opposed to the proposed system of public declarations of individual short positions proposed by the UK’s Financial Services Authority.

With that caveat, Aima would like to see the adoption worldwide of manager authorisation and supervision model based on the FSA’s approach, rather than any attempt to impose regulation on a fund-by-fund basis. The association also supports new policies to reduce settlement failure that would touch on the issue of naked short selling.

Noting that the UK’s Chancellor of the Exchequer Alastair Darling has talked about the need for an early-warning system for world financial markets, Baker says: ‘That will require lots of components drawn from different parts of the marketplace, including hedge funds, investment banks or sovereign wealth funds. This is our contribution to that process.’

Leaving aside for the time being the disclosure of short selling, Aima is proposing high-level aggregation of data regarding funds’ leverage, volatility and liquidity. ‘We advocate aggregation by different types of hedge fund strategy,’ he says

‘For example, it makes sense to look at the degree of gross exposure to net exposure for long/short funds. That shouldn’t be mixed up with, say, the amount of leverage used in a macro or managed futures fund. The proposal is to publish information about aggregate levels of leverage, and the liquidity and volatility characteristics of the underlying holdings, for up to a dozen hedge fund strategies.

‘Different strategies can support different levels of leverage. Leveraging of small cap Swiss equities is likely to be much lower than for a high-quality government bond portfolio that is much more liquid and much less volatile. Aima has already conducted research on this and published numbers showing leverage, volatility and liquidity by strategy, so there is a precedent for gathering this data.’

With the recent attention focused on liquidity mismatches for hedge funds, Aima suggests that aggregate information should collected on funds’ redemption provisions – for example, enabling observers to conclude that, say, 85 per cent of the market trades monthly on 45 days’ notice – and on major risk exposures, either by country or asset class.

‘We’re aiming for a ‘Goldilocks’ size, neither so big that it’s unmanageable nor so small that it won’t give you enough information,’ Baker says. ‘Some of the information can be collected directly from the managers, while other information will have to come through the established six-monthly prime broker survey, which has been running for a number of years.

‘There are still details to be worked out, such as whether aggregation covers the whole marketplace or there is a de minimis cut-off point, whether the information is to be gathered electronically, and whether there should be standard definitions that enable exposures across markets such as London, the US and Hong Kong to be added together.’

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