G20: Regulators priority is systemic risk not investor risk

The different hedge fund industry's stakeholders have been waiting for the G20's new rules announcement with each very different expectations. Hedge Fund managers were hoping for not too much burdensome new rules and ,on the other hand, investors were expecting new measures to protect their assets.

The following extract from the "Declaration on strengthening the financial system" at the G20 summit of April 2nd, 2009 describes the broad lines of the coming "new order":

"hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of the systemic risks that they pose individually or collectively. Where appropriate, registration should be subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management. We ask the FSB to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure that effective oversight is maintained where a fund is located in a different jurisdiction from the manager. We will, cooperating through the FSB, develop measures that implement these principles by the end of 2009. We call on the FSB to report to the next meeting of our Finance Ministers and Central Bank Governors; "

In regards to the other measures announced, commentators have focused particularly on the "minimum size" condition which may imply that only the largest hedge funds will be concerned by the new rules. The "minimum" mark is yet to be set but the risk of a broad set of new rules concerning all the industry looks now remote. The majority of the fund managers are probably happy with the outcome of the summit while a majority of investors are probably disappointed.

We think that the declaration is providing a message to investors that regulators' priority is to protect market against systemic risk and not to provide an extra direct protection to investors".The group of 20 has realized that they need to set achievable goals to the new regulation. The recent fraud cases in the investment management industry have revealed that regulators already have difficulties in enforcing the current regulation. Furthermore, the extra-burden of further regulatory rules on the small investment managers, who represents a majority of the hedge fund industry, will have pushed a lot of them out of business.

Investors should not expect too much from the "new rules" but according to the number of litigation cases brought by the SEC against investment managers in the US yet this year it seems that the enforcement of the current rules is already a positive step in itself.