Select Committee on Treasury Written Evidence


Memorandum from the Alternative Investment Management Association

  On behalf of the Alternative Investment Management Association please find attached written evidence in response to the recent request from the Treasury Committee. We have provided a submission only with respect to the last point under section 3 namely "Overall functioning of financial markets—the role of hedge funds in the recent financial disturbance" since the other topics do not relate to the industry that we represent. I am also attaching a description of the Association and its membership.

  1.  Hedge funds are merely one of a number of participants in financial markets and in terms of assets controlled are a significant minority compared with other groups such as mutual funds, pension funds, insurance reserves and sovereign wealth funds. Hedge fund managers operating in the UK control assets of $415 billion1 compared with estimated worldwide hedge fund assets of $2,500 billion1 (ie UK hedge fund managers are 17% of the global total).

  2.  Recent studies by influential groups (eg The Bank of England

http://www.bankofengland.co.uk/publications/fsr/2007/fsrfull0710.pdf;

The Financial Stability Forum http://www.fsforum.org/publications/publication—21_87.html;

The President's Working Group http://www.ustreas.gov/press/releases/reports/hedgfund.pdf;

The US Treasury http://www.treas.gov/press/releases/hp486.htm) have found no conclusive evidence that hedge funds are a source of instability in financial markets; on the contrary, evidence has been found that hedge funds are contra-cyclical in nature and are providers of liquidity to markets at times of stress. There have been several well-publicised examples in the recent past 2 in the U.S. and in Europe where hedge funds which specialise in the purchase of distressed assets have turned out to be the only buyers of businesses undergoing restructuring or otherwise on the brink of bankruptcy. Hedge funds are a valuable source of capital in such circumstances.

  3.  All hedge fund managers with investment operations in the UK (estimated to number nearly 400) are regulated by the Financial Services Authority. The low incidence, in absolute and relative terms, of high profile "blow-ups" and regulatory investigations amongst hedge funds in the UK attests to the strength of this approach.

  4.  Hedge funds cannot be viewed as one homogeneous bloc; they vary considerably in size, frequency of trading, area of specialisation, investment strategy and investor base. If they all did the same thing at the same time none of them would make much money for their investors.

  5.  During high profile market events, such as the recent sub-prime mortgage fall-out and the crisis at Northern Rock, it is not unusual to find hedge funds opposing each other publicly and vigorously on different sides of transactions with winners and losers being created accordingly.

  6.  The run on Northern Rock was not caused by the action of hedge funds.

SOURCE

1  Hedge Fund Intelligence survey June 2007.

2  The purchase of ResMae Mortgage Corporation by Citadel Investments in June 2007;

the purchase of Refco by Man Group in November 2005.

November 2007





 
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