Memorandum from the Alternative Investment
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 marketsthe
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
The Financial Stability Forum http://www.fsforum.org/publications/publication21_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.
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.