by Don Alexander, MBA
Associate, RSD Solutions Inc.
The costs from the recent financial crisis in terms of asset write-downs by financial institutions, wealth destruction and the lost output and job creation have refocused regulators attention on the role of hedge funds in the management of systemic risk.
Andrew Patton, Tarun Ramadorai and Michael Streatfield note in a recent VOXEU communique (9th April) Are Voluntary Hedge Fund Disclosures Reliable? Discuss some of these issues. In the wake of the financial crisis, the Securities and Exchange Commission (SEC) proposed a rule requiring US-based hedge funds to provide regular reports on their performance, trading positions, and significant counterparties.
Currently, hedge funds are part of the unregulated shadow banking system that perform financial intermediation (estimated at 50% of total intermediation process) and account for a significant portion of trading volume (over 50%) in different asset classes. Before the policy is implemented, Patton et al argue that such a move will benefit both regulators and investors.
Recent policy debates on the pros and cons of imposing stricter reporting requirements on hedge funds have raised various arguments. The benefits of disclosures include market regulators having a better view on systemic risks in financial markets, a better understanding of asset price dislocations, and investors and regulators being able to better determine the true, risk-adjusted performance of funds. Costs include the administrative burden of preparing such reports, and the risk of leakage of valuable proprietary information on trading strategies that may be derived from portfolio holdings.
The authors’ analysis suggests that mandatory, audited disclosures by hedge funds, such as those proposed by the SEC last year and due to be implemented in 2012 would be beneficial to regulators. They also suggest considering whether these reporting guidelines could also apply to disclosures to prospective and current investors. Currently they only apply to the funds' disclosures to regulators... They conclude that such information would help hedge fund and other investors make more informed investment decisions.
The IMF estimated that global financial institutions wrote down over $2 trillion in the value of assets on their balance sheet from the financial crisis from 2007 to 2010. If you add the loss of potential economic output and job creation the cost of the crisis makes it very expensive. The implementation of governance in the management of systemic risk is much less costly than the alternative.
For more on this follow the link: www.voxeu.org/index.php?q=node/7858
