The U.K. hedge fund industry, battered by a barrage of complaints from angry politicians, regulators and the British public, seems to be weathering the storm. Official hostility toward short-selling is softening as the Financial Services Authority holds firm to its January repeal of a temporary ban on shorting. This despite considerable parliamentary criticism, most notably from John McFall, chairman of the Commons Treasury Committee, who wants the prohibition reinstated.
With discussions of the ailing fortunes of major U.K. banks continuing to dominate headlines, the topic of short-selling has been superseded by the perhaps more pressing question of whether leading financial institutions will survive and the enduring issue of executive bonuses at those receiving government aid. The reprieve may be short-lived, however. The Group of 20 — a consortium of wealthy nations — meets in London on April 2, and the top item on the agenda is regulation.
Still, the U.K. hedge fund industry can take heart in knowing that the government’s regulatory model looks good in the wake of the Bernard Madoff scandal in the U.S.; it seems widely accepted that the FSA’s registration requirements for wealth managers would have prevented such a long-running fraud. U.K. regulation also looks better prepared because of the FSA’s strict rules on leverage disclosure by prime brokers and the self-enforced European practice of using independent administrators to calculate net asset values of hedge funds. With the December announcement by leading global hedge fund investor Union Bancaire Privée that it plans to cash out of all funds that don’t have an independent administrator, more investors seem to have decided that the practice of self-administration, until recently the norm among large U.S. funds, is no longer acceptable (see “Lifting the Veil”).
It’s no wonder the influential London-based Alternative Investment Management Association in February launched a global transparency initiative that has much in common with existing U.K. industry practice, a fact hedge fund advocates have played up, as it helps them keep a seat at the table. A February meeting of European Union leaders in Berlin ended with an endorsement of the idea of a comprehensive global regulatory framework to include hedge funds, and something similar is expected out of the G-20 summit. By having acted already to promote transparency and defend key industry practices, like short-selling, U.K. funds have staked a strong claim to a central role in discussions about what form broader regulation should take.
