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Dubai Opts for HF “Code of Practice” Over Full Regulation14 July 2007Special to AllAboutAlpha.com by: Timothy Laing, Unicredit
When asked about the approach taken by the proposal, the DFSA’s Ian Johnston said:
If this is what hedge fund oversight will look like in the future, then it will be difficult to argue against such proposals, voluntary or otherwise. In fact, these recommendations should fall under the heading of “common sense” first and “best practices” second. One can only wonder what the reaction would have been at the recent G8 summit if, instead of the “Locust” approach, Frau Merkel had come forward with a reasonable and level-headed proposal similar to what the DFSA has put forward. The Code of Practice is, understandably, focused on risk control. Many of these recommendations look similar to those from a two part paper published in the Journal of Alternative Investments in 2005/6 “Best Practices for Hedge Funds” and include such common sense items as: a skill set appropriate for the given HF strategy; a robust investment process; systems & procedures to mitigate various risks; adequate back office systems; and adequate valuation policies. Clearly the definitions of “adequate” & “robust” tend to change over time, especially during a sub-prime meltdown or Russian debt default. Regardless, dynamic markets need a flexible system of oversight and this list of best practices seems like a good (if basic) starting point; any hedge fund manager who finds himself unable (or unwilling) to comply with these recommendations is not worth his 2+20. Like the Global Investment Performance Standards (GIPS) or the CFA Code and Standards, developing a voluntary guide to best practices will help to guide the ongoing development of the industry without the risk of an additional level of regulatory inefficiency. Those managers who choose to comply with such a Code of Practice will gain a certain level of credibility with an increasingly well informed investing public. This proposal will certainly not be the last shot across the hedge fund bow. On June 19th, Sir Andrew Large was named to head a working group to consider a voluntary HF code of practice for European funds. His working group will surely consider the DFSA proposal in their deliberations. The question remains which of the various proposals will find wide acceptance, and will they do so before regulatory agencies take matters into their own hands? The Alternative Investment Management Association (AIMA) should come forward to take the lead on this project, as the CFA institute has done with performance presentation standards and other initiatives. An organization that is well known and respected, independent, and international in its scope is surely the best solution to this problem; an AIMA initiative seems like the logical solution. So does this proposal actually help fund managers generate Alpha for their clients? In a recent AAA posting this author defined the hunt for Alpha as:
By this definition, hedge fund managers who adopt such a code of practice would be doing everyone a favour. The alpha generated will come, at the very least, in the form of goodwill, creating better and more stable relations between hedge funds, clients and regulators. Sounds like a win-win-win situation to me. - T. Laing, July 10, 2007 Related Stories:
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