January 25, 2008
The Hedge Funds Self-Regulate
Posted by David Zaring

The Hedge Funds Working Group, a British-led endeavor, has come out with both a defense of hedge funds (we hedge! plus we invest in all sorts of asset classes! and so we're safe!) and a list of best practices, to which the funds are invited to sign on.  I say it's an effort to forestall regulation and a disclosure-to-client-oriented approach.  But have a look yourself.

With the markets all ashudder, what do the hedge funds think about their risk obligations?  Here's the HFWG best practice:

A hedge fund manager should put in place a risk framework which sets out the governance structure for its risk management activities and specifies the respective reporting lines, responsibilities and control mechanisms intended to ensure that risks remain within the the manager’s risk tolerance as conveyed to and discussed with the fund governing body.

And it should tell this risk policy to investors.  Hmmm.  It's not exactly Basle Accord style capital adequacy.  But maybe it'll keep the regulators focused on other financial institutions, like French banks with easily circumvented risk analysis software.

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Comments (6)

1. Posted by J.W. Verret on January 25, 2008 @ 12:35 | Permalink

You may be interested in my self-regulation proposal over at harvard corp gov: http://blogs.law.harvard.edu/corpgov/2008/01/24/a-self-regulation-proposal-for-the-hedge-fund-industry/

2. Posted by david on January 25, 2008 @ 13:41 | Permalink

That IS intersting. And not so very different than thw hfwg approach. This mau call for a follow up.

3. Posted by David Zaring on January 25, 2008 @ 15:30 | Permalink

To comment reading spelling afficianadoes, I'll apologize for the illiteracy of the comment above, left with all too quick typing on my all too small blackberry in an all too busy train station.

4. Posted by Michael Guttentag on January 25, 2008 @ 17:41 | Permalink

David: what makes you think it was an easy matter to circumvent the risk analysis software?

5. Posted by Jake on January 25, 2008 @ 21:38 | Permalink

Ahem. You mean "aficionados," Mr. Zaring?

More to the point. Hedge fund manager today equals witness on the stand before too long. Passing off responsibility on software is a truly weak excuse.

And let's not confuse with the Basel accords (not "Basle," Mr. Zaring) with real world credit risk, please. Basel addresses bank solvency measures, not transaction-specific credit risk. Gimme a break.

6. Posted by David Zaring on January 25, 2008 @ 21:48 | Permalink

Mike - Well, the guy who did it had a "weak mind" according to his bosses and sinfully went to a non-elite business school. And he wasn't in charge of running the software or anything, right? And Jake - I'm down with Basle and "does," but I'm old school that way, and banks do assess their capital adequacy by reviewing all of their transactions, right? But maybe I'm missing something.

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