Does the alternative investment industry need regulation?
Wednesday, 23 June, 2010
The alternative investment industry, made up of hedge funds and private equity companies, among others, has come heavily under fire for being a major cause of the credit crisis, and is facing a raft of legislation on a pan-European scale. But is this what the industry needs?
Yes, I think it’s difficult to argue that hedge funds do not need regulation because there have been concerns for a long time which can be backdated to their role in the Asian currency crisis in the late 1990s and short selling, and the contribution to market turbulence during 2007 and 2008, explains Guy Fraser-Sampson, private equity expert at Cass.
Fraser-Sampson argues that the objection is not to hedge funds being regulated, rather that the legislation which the European Union is pushing through adopts a broad brush approach which confuses the regulation of hedge funds, private equity funds, and other alternative investment funds, which are all very different from each other. Hedge funds, for example, deal in public markets, whereas private equity funds do nothedge funds use derivative instruments including short-selling techniques and leveraging, so there is scope for making abnormal market conditions worse.
Fraser-Sampson suggests that the private equity industry hasn’t done a good job in gettings its case across: The private equity industry in Europe has to speak with once voice and because that’s the way in which their representation is set up. Private equity may no longer be considered to be a discreet asset class we have a small number of very large firms and what they do now has become so different to what other private equity managers do that they could certainly be ranked as a separate asset type or class and that’s the problem. The regulators blame the mega buyout funds, which leaves the rest of the firms in the same asset class to have a voice. All private equity funds are regulated, hedge funds are not, and as they are dealing with public markets and leverage, then you can see why it’s a strange state of affairs.
The Cass Talks interviews are an opportunity to hear Cass faculty give their perspective on current business and finance news stories, global issues affecting the business world and new research coming out of the School.
Guy Fraser-Sampson is a private equity expert at Cass Business School. Listen, watch and download Guy Fraser-Sampson’s Cass Talks and see other Cass academics share their opinions at www.cass.city.ac.uk/casstalks