Singapore Hedge Fund

Alternative asset management in Singapore

Don’t Blame Hedge Funds!

A really good article from the New York Time… I thought you might find it interesting:

By MELVYN KRAUSS
Published: June 24, 2009

When President Obama unveiled his financial regulation plan last week, a collective sigh of relief was heard throughout the U.S. financial community. The “regulation overkill” many feared on Wall Street had not materialized.

So bravo to Mr. Obama, who has demonstrated the good sense not to kill the goose that laid all those golden eggs.

Will Europe’s politicians be smart enough to follow his lead? The jury is out. But there is reason to believe “regulation overkill” may be on the menu for Europe.

Consider the case of hedge funds. They have become a favorite target for European politicians because they are largely not regulated, use considerable leverage and created a new class of wealthy youngish people who are widely envied and resented.

But the big lie about hedge funds is that they are one of the causes of the financial crisis. Speaking of hedge funds last week at a conference in Milan, the European Central Bank executive board member Lorenzo Bini-Smaghi asserted that “whoever was not regulated before does not want to be regulated and talks of over-regulation, but the fact they weren’t regulated was one of the causes of the crisis.”

This is nonsense. The Federal Reserve, not hedge funds, created the housing bubble that blew up in our faces. Banks, not hedge funds, made dubious loans to people who couldn’t afford the houses they were buying. Bankers, not hedge funds, bundled these “toxic assets” and sold them to other financial institutions. A.I.G. is an insurance company, not a hedge fund.

There is not one serious economist in the United States who believes that hedge funds were one of the causes of the crisis — even though many believe there needs to be more regulation of hedge funds because of their size and alleged potential for systemic risk.

The Obama plan takes a moderate approach to the issue. It compels hedge funds to register with the Securities and Exchange Commission and provide some administrative data. This imposes a compliance burden on the funds but nothing they can’t live with.

While hedge funds are little more than a side show in the United States, in Europe they have become a hot button issue. The leader of a campaign for E.U. regulations of hedge funds, the socialist member of the European Parliament Poul Nyrup Rasmussen, pounds the table in a media interview and taunts hedge fund managers with the statement, “What are you afraid of?”

But it’s not what the hedge funds should be afraid of that’s the issue; it’s what the European Union should fear if it goes through with tough measures against alternative investments. Over-regulation will cause the better European-based hedge funds to flee the E.U. for less hostile regulatory environments, even though they will continue to trade on the European exchanges.

This means the European regulatory authorities will have even less knowledge than they do now of the trading activities going on inside their borders. What would they gain by this?

Of course, the big losers will be European investors who would be restricted to investing their capital with E.U.-based firms — European pension funds and pension fund beneficiaries. They will suffer unwanted declines in their rates of return.

Ironically, the hedge funds themselves would merely be inconvenienced by over-regulation. When European investors are forced to pull out, the better hedge funds easily will replace their money with that of the sovereign wealth funds from places like China and Singapore. Instead of a hedge fund operator living in London managing money for a German pension fund, the trader will be living in Zurich and managing money for the Singapore government.

In the investment world, the ultimate scarce resource is trading talent, which is internationally mobile. President Obama understood this, which is why he chose a moderate course in regulating hedge funds.

Protectionism is another factor lying behind some of the attacks on hedge funds. Europe’s hedge fund industry is located primarily in London. France’s president, Nicolas Sarkozy, wants to change this by using strict E.U. regulations to force Britain to “harmonize” itself out of business. He wants part of the hedge fund action for France.

For protectionists, the war against hedge funds is a thinly disguised war against London’s influence. Why should other Europeans — particularly, the British — cooperate with him?

Melvyn Krauss is a senior fellow at the Hoover Institution, a think tank at Stanford University.

Jean Viry-Babel
senior partner
VBK partners

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Filed under: hedge fund, , , , ,

Don't Blame Hedge Funds!

A really good article from the New York Time… I thought you might find it interesting:

By MELVYN KRAUSS
Published: June 24, 2009

When President Obama unveiled his financial regulation plan last week, a collective sigh of relief was heard throughout the U.S. financial community. The “regulation overkill” many feared on Wall Street had not materialized.

So bravo to Mr. Obama, who has demonstrated the good sense not to kill the goose that laid all those golden eggs.

Will Europe’s politicians be smart enough to follow his lead? The jury is out. But there is reason to believe “regulation overkill” may be on the menu for Europe.

Consider the case of hedge funds. They have become a favorite target for European politicians because they are largely not regulated, use considerable leverage and created a new class of wealthy youngish people who are widely envied and resented.

But the big lie about hedge funds is that they are one of the causes of the financial crisis. Speaking of hedge funds last week at a conference in Milan, the European Central Bank executive board member Lorenzo Bini-Smaghi asserted that “whoever was not regulated before does not want to be regulated and talks of over-regulation, but the fact they weren’t regulated was one of the causes of the crisis.”

This is nonsense. The Federal Reserve, not hedge funds, created the housing bubble that blew up in our faces. Banks, not hedge funds, made dubious loans to people who couldn’t afford the houses they were buying. Bankers, not hedge funds, bundled these “toxic assets” and sold them to other financial institutions. A.I.G. is an insurance company, not a hedge fund.

There is not one serious economist in the United States who believes that hedge funds were one of the causes of the crisis — even though many believe there needs to be more regulation of hedge funds because of their size and alleged potential for systemic risk.

The Obama plan takes a moderate approach to the issue. It compels hedge funds to register with the Securities and Exchange Commission and provide some administrative data. This imposes a compliance burden on the funds but nothing they can’t live with.

While hedge funds are little more than a side show in the United States, in Europe they have become a hot button issue. The leader of a campaign for E.U. regulations of hedge funds, the socialist member of the European Parliament Poul Nyrup Rasmussen, pounds the table in a media interview and taunts hedge fund managers with the statement, “What are you afraid of?”

But it’s not what the hedge funds should be afraid of that’s the issue; it’s what the European Union should fear if it goes through with tough measures against alternative investments. Over-regulation will cause the better European-based hedge funds to flee the E.U. for less hostile regulatory environments, even though they will continue to trade on the European exchanges.

This means the European regulatory authorities will have even less knowledge than they do now of the trading activities going on inside their borders. What would they gain by this?

Of course, the big losers will be European investors who would be restricted to investing their capital with E.U.-based firms — European pension funds and pension fund beneficiaries. They will suffer unwanted declines in their rates of return.

Ironically, the hedge funds themselves would merely be inconvenienced by over-regulation. When European investors are forced to pull out, the better hedge funds easily will replace their money with that of the sovereign wealth funds from places like China and Singapore. Instead of a hedge fund operator living in London managing money for a German pension fund, the trader will be living in Zurich and managing money for the Singapore government.

In the investment world, the ultimate scarce resource is trading talent, which is internationally mobile. President Obama understood this, which is why he chose a moderate course in regulating hedge funds.

Protectionism is another factor lying behind some of the attacks on hedge funds. Europe’s hedge fund industry is located primarily in London. France’s president, Nicolas Sarkozy, wants to change this by using strict E.U. regulations to force Britain to “harmonize” itself out of business. He wants part of the hedge fund action for France.

For protectionists, the war against hedge funds is a thinly disguised war against London’s influence. Why should other Europeans — particularly, the British — cooperate with him?

Melvyn Krauss is a senior fellow at the Hoover Institution, a think tank at Stanford University.

Jean Viry-Babel
senior partner
VBK partners

Filed under: hedge fund, , , , ,

Obama Wants SEC, CFTC to Police Derivatives

WASHINGTON — The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal.

The administration also wants new record-keeping and reporting requirements on all over-the-counter derivatives as part of its proposed revamp of financial regulators.

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan.

The proposal, obtained Tuesday evening, was being circulated through Washington ahead of President Barack Obama’s announcement of a major proposed rewrite of U.S. financial regulations. Many of the proposals would require Congress to act, so significant changes are likely.

The Obama proposal touches on regulation of banking, securities, mortgages and other financial products. For derivatives, the plan describes core principles, such as “preventing activities in those markets from posing risk to the financial system.” It also seeks to promote the efficiency and transparency while preventing market manipulation, fraud, and other market abuses. The plan also seeks to ensure “that OTC derivatives are not marketed inappropriately to unsophisticated parties.”

It calls for ensuring the SEC and CFTC “have clear, unimpeded authority to police and prevent fraud, market manipulation, and other market abuses involving all OTC derivatives.”

Earlier Tuesday, a senior Obama administration official said the government plans to regulate and standardize oversight of over-the-counter derivatives, register “hedge funds and other private pools of capital.”

Currently, there is no comprehensive, direct regulation of the over-the-counter derivatives market.

The Commodity Futures Modernization Act of 2000 prevented the Securities and Exchange Commission and the Commodity Futures Trading Commission from directly regulating swaps, although the SEC has some anti-fraud authority on security-based swaps. Banking regulators also may look at swap data as part of their routine regulatory supervision of banks.

In addition, some products like energy swaps traded electronically on exempt commercial markets may be overseen by the CFTC if they help set market prices.

Processing swaps through clearinghouses, which guarantee trades and cushion the market impact in the event of a default, is only voluntary right now. Swaps can be traded electronically or via telephone.

The Obama regulatory plan proposes to require “all standardized OTC derivative transactions to be executed in regulated and transparent venues and cleared through regulated central counterparties.”

To improve price transparency, standard products would also be moved onto exchanges or electronic trade execution systems. Trading of over-the-counter customized products would still be allowed, but regulators will for the first time have authority to collect data on these trades.

“Key elements of that robust regulatory regime must include conservative capital requirements (more conservative than the existing bank regulatory capital requirements for OTC derivatives),” the plan said. Other elements would include business conduct standards, reporting requirements, “and conservative requirements relating to initial margins on counterparty credit exposures.”

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In addition, the CFTC will for the first time be able to set position limits on over-the-counter derivatives if they help set market prices.

From Rob Wells at and Sarah N. Lynch at the Wall Street Journal

Jean Viry-Babel
senior partner
VBK partners

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