Hedge Funds on the “Global Agenda” at Davos

Hedge Fund Regulation 26 Jan 2007

The Annual Meeting of the World Economic Forum in Davos, Switzerland is a media outlet’s dream.  With hundreds of CEOs, academics, public figures and leaders of civil society in one place, interviews are easy to set up and chance meetings in the hallway are common.  So with the surfeit of news and blog postings already covering Davos, we have (so far) been a Davos-free zone.  But we make an exception here.

January 26 – The goal of the WEF is to help solve complex multi-sector (private/public/NGO) problems on the “global agenda”.  Hedge fund issues have not typically had the geopolitical or social policy implications of, say, terrorism or climate change.  Until recently – as regular people (e.g. pensioners whose nest-eggs were partly invested in Amaranth) have become affected.

So on Friday, January 26, a session was held on the apropos topic of hedge fund transparency.  Panelists included John Mack (Morgan Stanley), John Thain (NYSE), Henri-Paul Rousseau (CDP) among others.  According to the conference programme:

“Last year’s high profile Amaranth debacle reminded regulators of the 1998 Long-Term Capital Management collapse. Concern is growing that the opaque nature of the US$ 1,300 billion hedge fund industry may precipitate a future financial crisis, spurring demands for greater transparency. 1) How do the size and nature of hedge fund activities both increase and reduce risk to the global financial system? 2) Would greater transparency improve the situation? What would the impact on the industry and the markets be?”

This session had the potential to degenerate into a bun fight had German Chancellor Angela Merkel been there (in her keynote speech on Wednesday, she re-affirmed her concern about a lack of hedge fund transparency).  But it seems that she was not at the session – or if she was, that no buns were actually launched.

According to the panel summary provided by the WEF, panelists at this session were generally skeptical of regulations governing hedge fund transparency.  Apparently questioning how much enhanced transparency would help anyway, one panelist suggested that Amaranth’s failed positions “only look risky with a fine tooth comb”.  The challenge of providing transparency, according to another panelist, was to get “information to someone you trust – not into the public domain”.

While the observation that both LTCM and Amaranth failed without bringing down financial markets was raised “several times”, it seems that no clear consensus was reached on whether hedge funds have a stabilizing or destabilizing effect on financial markets.

Some of the panelists sounded sanguine about hedge fund fees according to the official summary.  One said that hedge funds actually exist because investors are willing to pay these fees while another said that fees should drop as returns come under pressure – but that they weren’t.  (Our theory on that)

As alternative investments make their debut on the “global agenda”, policy makers will surely begin asking a lot more questions.  Explicitly integrating hedge funds into the Davos agenda every year would be a good first step toward addressing their concerns.

View Session Summary from “Hedge Fund Transparency” (Davos 2007)
View Session Summary from “Hedge Fund Fever Heats Up” (Davos 2005)
View Session Summary from “The Return of Hedge Funds” (Davos 2003)

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