Hedge funds friends not foes to markets

A lack of liquidity in hedge funds leaves some investors unable to withdraw their investments because of “gates” imposed by managers.

Speaking at the Australian Securities and Investments Commission (ASIC) summer school, Kim Ivey, chairman of the Alternative Investment Management Association (AIMA), said gates left only a portion of investors able to withdraw funds, also noting the issue of frozen redemptions resulting from liquidity in hedge funds.

Ivey defended hedge funds, saying they were not the source of the crisis, but noted that the hedge fund community as an overall measure did not deliver expectations of absolute return. He cited results showing that 20 per cent of hedge funds made money and, in the context of overall losses resulting from the crisis, compared $374 billion in hedge fund losses to the $30 trillion losses in global equity markets.

However, he said in his presentation that “active risk management is likely to become more important".

Ivey acknowledged the “systemically significant risk” of leverage, noting the growth of assets and leverage deployed. He said while leverage has come down it is certainly a systemic issue and should be disclosed to regulators.

“Disclosure of systemically risky priorities is prudent,” he said, but questioned how it can be done. He later commented that traditional asset managers are not being forced to disclose their positions.

Ivey cited work between AIMA and the Australian Prudential Regulatory Authority (APRA) on hedge strategies in 2003 and said the onus is on hedge funds to prove to trustees how they fit into a portfolio prudentially.

He said AIMA is pushing for the examination of certain parts of the hedge funds industry that should be disclosed to regulators.

“Having disclosures around debt isn’t a bad thing,” Ivey said, adding it was not a “cottage industry anymore”.

He said where we’re going, we’ll need regulatory overview.

David Hartley, Sunsuper’s chief executive, said “hedges can assist in market efficiency” and argued that managers are in a position to identify opportunities in markets, such as mispricing.

“Where hedge funds are friendly to markets, there is an increase in liquidity and efficiency, thereby reducing costs,” he said.

However, Hartley noted that on the downside, hedge funds “have made themselves become the cause of inefficiency”, arguing that instead of seeing and correcting issues, hedge funds become “market makers”.

Hartley urged regulators to address the issue of “short positions” being fed into rumour mills, saying they should get transparency on these and examine companies. He also cautioned that “private equity style exposures have crept into hedges”.

Hartley noted that Sunsuper got rid of its fund of hedge funds last year.

Ivey said figures show there are approximately 200 hedge funds being sold into Australia, with about 60 to 65 managers. He noted the prevalence of overseas managers coming into Australia with products. “The Australian landscape for hedge funds is extremely global,” he said.