Two committees formed by the President’s Working Group on Financial Markets today proposed hedge fund industry reforms and defined hedge funds as distinctly different from private equity funds.
“These best practices are coming at the height of robust discussions about the need for stronger market discipline,” US Treasury secretary Henry Paulson said. “While they are aimed at specific market participants, and obviously not intended as a policy response to specifically address current, broader financial market issues, the practices are consistent with the spirit and intent of the PWG's recommendations for enhancing market transparency and risk management”.
Noting the industry’s global nature, Paulson added that the reforms are “consistent with the work recently completed in the United Kingdom by Sir Andrew Large's Hedge Fund Working Group”.
Each of the two committees, one consisting of hedge fund managers and the other of hedge fund investors, issued a report, with the investor group defining hedge funds as “a legal construct, not an asset class”.
It said hedge funds typically “invest both long and short; are leveraged; have high performance-based fee structure; normally require co-investment by fund manager; are able to use futures and other derivatives; have broad investment universe; can have large cash allocations; have an absolute return objective; and investor access is regulated but product itself is lightly regulated”.
The investors, which included representatives from major institutional investors,placed these characteristics against a list of their contraries attributed to “traditional products.”
The asset managers’ report did not attempt to define the asset class, but indicated a series of best practices concerning disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest.
The investors issued two sets of guidelines for responsible investing into hedge funds: the fiduciary’s guide, which provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio; and the investor’s guide, which provides recommendations to those charged with executing and administering a hedge fund program once a fiduciary has decided to add hedge funds to the investment portfolio.
The President’s Working Group on Financial Markets was established after the 1987 stock market crash, Black Monday, to help guide legislative and private sector policy. The group is comprised of the Treasury secretary, the Federal Reserve chairman, the Securities and Exchange Commission chairman and the Commodities Futures Trading Commission chairman.