Institutional Investor's Alpha Magazine - November 2007 - (Page 14)

Setting Standards T he subprime mortgage mess and the sudden loss of liquidity in the global credit markets provided an unexpectedly dramatic backdrop for last month’s release of the London-based Hedge Fund Working Group’s inaugural paper on best practices — a bid to keep regulators at bay. The self-appointed volunteer group Term Capital Management imploded, rocking the ﬁnancial sector and necessitating a $3.65 billion emergency bailout from 14 Wall Street firms, orchestrated by the Federal Reserve Bank of New York. Although a few sizable U.S. hedge funds, including funds run by Bear, Stearns & Co. and Goldman, Sachs & Co., have run into trouble, managers are quick to point out that the credit market crunch originated with regulated entities — namely the investment banks themselves. Despite the irony of the situation, Large says no one in the group is feeling complacent. The need to meet increased margin calls, ensure accurate portfolio valuations and address investors’ concerns and expectations is focusing their minds on best practices at their own ﬁrms. The founding members are Brevan Howard Asset Management, Brummer & Partners, Centaurus Capital, Cheyne Capital Management, CQS, Gartmore Investment, GLG Partners, Lansdowne Partners, London Diversified Fund Management, Man Group, Marshall Wace, Och-Ziff Capital Management Group, RAB Capital and Sloane Robinson. Members have worked swiftly over the past three months to come up with a substantial document, based closely on the statutory business principles set out by the U.K.’s Financial Services Authority. At the top of their wish list, Large says, is much greater disclosure from their peers — a difficult proposition at best. Although hedge fund managers are known for their reluctance to disclose much of anything about their business operations, that is exactly what the group is advising. Large is optimistic that by encouraging hedge fund portfolio managers to operate on a “comply or explain” basis, the industry will be able to impose better risk controls, create more-transparent valuation practices and improve its own governance. To that end, the working group is proposing the formation of a board of trustees that would assume responsibility for the standards, including updating them in the future — although enforcement, such as it is, would probably still fall to investors performing their own due diligence. — Loch Adamson Sir Andrew Large, chairman of the London-based Hedge Fund Working Group (pictured in front of Mount Kilimanjaro): Planting the ﬂag for self-oversight. came together in June, after 14 of the leading British and European hedge fund managers awoke to the threat of greater regulatory interference. They suddenly found further common cause as increased market volatility put pressure on their strategies and operations. “The turmoil certainly helped focus our minds on what best practices ought to be,” says the group’s chairman, Sir Andrew Large, a former deputy governor of the Bank of England. “We spent a lot of time discussing risk management — especially liquidity risk — and how to value complex ﬁnancial instruments in the midst of a crisis.” Large knows a thing or two about risk: The former financier, who is also chairman of Marshall Wace’s MW TOPS closed-end investment fund and an avid mountaineer, just ﬁnished a climb of Mount Kilimanjaro’s Uhuru Peak. He is now back in London gathering industry responses to the paper. To the group’s considerable relief, the latest crisis was not occasioned by the failure of any particular hedge fund, unlike in previous crises: In 1994, as short-term interest rates rose, mounting losses at Askin Capital Management nearly stopped the mortgage-backed securities market in its tracks; in 1998, as Russia defaulted on its debt, Long- Correction In the October 2007 feature “Passage to India,” the following observation should have been attributed to Gautam Prakash, founder of Bethesda, Maryland–based hedge fund firm Monsoon Capital: “India’s growth is multifaceted, with many tailwinds driving the country’s growth story. The combination of stable, aggressive and long-term-oriented family owners with competent and high-quality professional managers is potent and has finally caught the attention of global fund managers.” 14 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2007

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2007

Institutional Investor's Alpha Magazine - November 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Patriot State The Good Guys: College Connection Interview: Currency of Change Cover Story: Comeback Kid Strategies: Masters of Art Research Center: Alpha Awards: Top Technology Providers Top Analysts Alpha Bytes: Critical Choice Unhedged: Commentary: Banking on a Bubble

Institutional Investor's Alpha Magazine - November 2007

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