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Apr-15-2008Hedge Fund 'Best Practices' Aimed at Improving Markets(topic overview)
CONTENTS:
- The Treasury panels urged that firms disclose hard-to-value assets and approve "comprehensive'' investor disclosure in the same manner as public companies. (More...)
- KPMG commissioned an independent research firm to interview pension funds, funds of hedge funds and investment consultants with total assets under management or advice of around USD400bn. (More...)
- In January 2008, following an extensive consultation process, the HFWG published a report outlining 28 principles for best practice, which cover five key areas - disclosure, risk management, valuation, shareholder conduct and fund governance. (More...)
- Sovereign wealth funds, investment funds owned by national governments, have become increasingly active in buying U.S. assets with expanding foreign exchange reserves from oil sales and trade. (More...)
- The severity of the pullback was attributed to frothy valuations and slowing economic growth expectations, as well as general disarray in financial markets. (More...)
- Paulson stressed that state and local regulators need to strengthen oversight of mortgage originators, while credit rating agencies must "perform robust due diligence" of originators of assets that are securitized or used as collateral for structured products. (More...)
- "Given the significant short-term downside risks, we are taking action," Paulson said. (More...)
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The Treasury panels urged that firms disclose hard-to-value assets and approve "comprehensive'' investor disclosure in the same manner as public companies. "The hedge fund industry has a critical responsibility to adopt strong business practices that reflect both its growth and the important role it plays in global financial markets,'' Eric Mindich, chief executive officer of Eton Park Capital Management in New York and chairman of the asset managers' committee, said in a statement. "Our goal is to have those practices be accepted by both investors and hedge fund managers and perhaps most importantly to have those recommendations become common practice throughout the industry,'' Russell Read, chief investment officer of the California Public Employees' Retirement System in Sacramento, California, and chairman of the investors committee, said in a statement. [1] The Treasury on Tuesday is due to release hedge fund best practices guides from two committees it commissioned last year -- one for hedge fund managers and one for hedge fund investors. They were among a number of steps that the Treasury-led President's Working Group on Financial Markets recommended in September 2007 to protect investors and reduce systemic risks posed by the growth of hedge funds while not restraining financial innovation. The two committees started their work as financial market stress from subprime mortgage defaults were gathering steam, creating worries about investments made by the nearly $2 trillion hedge funds sector.[2] The Hedge Fund Standards Board (HFSB) welcomes the reports on best practices for hedge fund managers and investors published today in the U.S. by the President'''s Working Group on Financial Markets. Sir Andrew Large, chairman of the HFSB, said: '''There is much common ground with the best practice standards for managers we published earlier this year. Our fundamental aims are the same and we both share a similar approach to addressing issues such as valuation, risk management and disclosure.[3] Last year 14 of the UK's largest hedge fund managers formed the Hedge Fund Working Group with the aim of establishing a benchmark of best practice in the industry and to promote self-regulation. In January this year the group published a report outlining 28 principles for best practice in the areas of disclosure, risk management, valuation, shareholder conduct and fund governance, and created the Hedge Funds Standards Board to act as their custodian. The 14 original signatories have committed to 'comply or explain' by the end of this year. More than half of the pension funds surveyed say they will require hedge fund managers to comply with the standards within three years.[4]
The two committees, one comprising asset managers and the other investors, agreed that hedge funds need to abide by new standards of disclosure. The asset managers report, which noted that there are close to 8,000 such funds managing about $2 trillion, said the industry should improve disclosure, adopt "robust'' valuation and risk management procedures, and overhaul business operations and compliance practices.[1] The committee's report calls for market discipline to protect investors and says hedge fund valuations should produce firm-style quarterly reports conducted by independent committees. The best practices for the asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest.[5]
The summaries said best practices for hedge funds and investors should help contribute to a clarifying market conditions and reducing risk. 'No set of best practices can provide solutions to all of the complex issues facing the financial industry,' they said. Specifically, the Asset Managers Committee within the PWG called on hedge funds to improve disclosure in order to make it easier for investors to determine whether they should invest in a fund, and to monitor their investment. It also asked hedge funds to set up a system for assessing hard-to-value assets, and report each quarter on the profits and losses related to these assets.[6] WASHINGTON (Thomson Financial) - Two key committees of the President's Working Group (PWG) on financial markets today recommended a set of best practices aimed at requiring hedge funds to increase their risk management practices in a range of areas, including the way they assign values for hard-to-value assets. The committees also recommended guidelines for how hedge funds can operate more transparently, and how investors can make better judgments about whether it makes sense to invest in these funds.[6] Following the signing ceremony, Arab Bank Chairman/CEO Abdel Hamid Shoman said the partnership with Allianz Global Investors is prone to optimize benefits and diversify options for investors and opportunities Arab Bank makes available for its customers, in a way that spares them risks amidst changing circumstances in regional and international markets. Shoman added that expanding and diversifying investments in international financial markets have become vital elements in efforts to maximize returns, including the move towards special investment funds that try to achieve sound performance and the adoption of best practices in asset management with the aim of increasing their profitability. He stressed that Arab Bank, which pursues an ambitious strategy in this regard, seeks to boost profits, achieve the set growth target in the medium and long run and generate sustainable income from investment portfolios, applying the best asset management at the lowest volatility levels. Arab Bank and Arab Bank Group, he added, are constantly developing products and offering investment packages through diversified funds oriented towards developing resources and increasing their returns. He stressed that the bank's overall strategy in regional and international markets seeks to empower Arab Bank to compete strongly in the world's financial markets in general and the Middle East and North Africa (MENA) region in particular.[7]
Paulson said there has been progress on increasing disclosure and improving risk and capital management in the financial sector, noting U.S. government and Financial Stability Forum (FSF) measures. The Group of Seven industrialized nations meeting here strongly backed an FSF package of reforms and called for the banks to "fully and promptly" state their risk exposure due to the current financial market turmoil within 100 days. Paulson said the IMF, as a member of the FSF, has an important role "to play in providing analytic support and conducting financial surveillance of its member countries." Paulson said the IMF itself "must reform to retain its relevance and legitimacy," citing the need to adpat to "rapid technological change, the rise of dynamic emerging market economies and the increasing internationalization of financial markets." Specifically, he called for the IMF to "sharpen its focus on" exchange rate surveillance, "openness to international investment, particularly meeting policy challenges posed by sovereign wealth funds and supporting global financial market stability." The United States has been a strong critic of countries which manage their currencies closely -- such as China -- and Paulson pointedly said "strengthening implementation of this core mandate is integral to IMF legitimacy; insufficient progress would put success of the broader modernization effort at risk."[8] Paulson welcomed the IMFs work on development of a set of best practices for rapidly growing sovereign wealth funds, and said it was important for the fund to work with both sovereign wealth fund countries and countries receiving the investments. The U.S. Treasury secretary also said he supported the recommendations of the multi-nation Financial Stability Forum, unveiled on Friday, to improve risk management, accounting, valuation of structured products, credit rating agencies and other responses to stress in the financial system. As a member of the FSF, the IMF should report information on financial stability risks to the forum and then incorporate the FSFs conclusions into its currency surveillance work, Paulson said.[9] 'With the two distinct sets of practices released today, we now have a comprehensive approach to implementing the principles and guidelines put forth by the PWG in February 2007,' U.S. Treasury Secretary Henry Paulson said today. 'The PWG principles have already been put into practice, and today's release reinforces our belief that a combination of robust market discipline and regulatory policies best protect investors and mitigate systemic risk,' he said. Both sets of guidelines are open to public comment for 60 days, after which both committees will review comments received, revise the guidelines 'as necessary,' and then issue final guidelines. While the guidelines were requested before the mortgage and credit crisis took hold last summer, summaries of the two reports say these best practices are needed given recent market turmoil.[6] The release of the report "reinforces our belief that a combination of robust market discipline and regulatory policies best protect investors and mitigate systemic risk,'' Paulson said in a statement in Washington. "Both market and regulatory practices will evolve from here, but this is certainly a logical step at this time.'' The panels said hedge funds must "better evaluate and implement strong practices to better manage their businesses and reduce risk,'' according to a summary of the recommendations released yesterday by the Treasury. "The robust practices set forth in this report will be critical to and consistent with the goal of reducing systemic risk.''[1]
WASHINGTON (AP) — Two advisory groups assembled by Treasury Secretary Henry Paulson proposed new "best practices" Tuesday for the hedge fund industry, designed to improve and clarify the operations of the giant pools of capital. The guidelines call on hedge fund managers to improve their operating procedures in such areas as disclosure, valuation of their assets, risk management and guarding against conflicts of interest.[10] April 15 (Bloomberg) -- Two panels appointed by Treasury Secretary Henry Paulson advised hedge funds to adopt guidelines including increased disclosure and strengthened management of risk in the aftermath of the rout in credit markets.[1]
The '''best practice''' guidelines, drawn up by two committees formed under the President'''s Working Group on Financial Markets last September, will be issued Tuesday as part of the efforts by Hank Paulson, Treasury secretary, to formulate a private sector-led response to concerns about the activities of secretive hedge funds and avoid potentially draconian regulations.[11] The recommendations follow last year's reports from the President's Working Group on Financial Markets, which investigated the hedge fund sector. "More than many other investment vehicles, hedge funds require in-depth and continuous oversight by their investors," the panel said in a statement. "This report calls on hedge funds to implement these new standards."[12]
The recommendations by the asset managers''' committee call on hedge funds, which manage about $2,000bn in assets, to adopt new standards in the areas of disclosure, asset valuation and conflicts of interest, among others. One recommendation is that hedge fund mangers disclose hard-to-value financial products, such as complex derivatives, which have been at the heart of the current market turmoil. Another is that hedge funds provide investors with summaries of their performance, annual and quarterly reports, and independently audited financial statements ''' based on disclosure models used by public companies. Managers should also assess the creditworthiness of counterparties and understand the complex legal relationships they may have with these counterparties. A summary of the report claimed that these and other new standards will be adopted by hedge funds with over $140bn in assets under management.[11] The final HFWG report, with consultation documents and more information about the Standards and how to sign up, can be found on the HFSB's website, at the link below. Tom Brown, European head of KPMG's Investment Management & Funds Practice, said that the results provided a compelling case for managers to sign up to the standards, particularly if they were expecting to attract institutional money. "Markets may go up or down, but pressure on managers for increased investor assurance and transparency will only go up," he added. For this survey, KPMG commissioned an independent research firm to interview pension funds, fund of hedge funds and investment consultants, with total assets under management of approximately $400 billion.[13] When making investment allocations, eight out of 10 pension funds would favour a hedge fund manager who had complied with the best practice standards recently outlined by the Hedge Fund Working Group, according to a survey of investors commissioned by KPMG. 'These results provide a compelling case for managers to sign up to the standards, particularly if they are expecting to attract institutional money,' says Tom Brown, European head of KPMG's investment management and funds practice.[4] A KPMG survey into investor perspectives of the standards outlined by the hedge fund working group (HFWG) has found that, when making investment allocations, eight out of 10 pension funds prefer a hedge fund manager who has complied with the industry best practice standards.[14]
In 2007, 14 of the UK's largest hedge fund managers set up the Hedge Fund Working Group (HFWG) to establish a benchmark of best practice and promote self regulation. Drury concluded: "Managers can voluntarily choose to adopt the best practice standards proposed by the HFWG and continue to attract significant capital inflows from institutions, or ignore the recommendations and face the very real threat of more stringent regulation being imposed upon them." The survey also found pension funds were expected to double their allocation from and average 4% to 8% to the asset class over the next three years.[15] The KPMG survey assessed the attitudes of UK pension schemes and other investors toward the working group's standards and found that 80 percent of hedge funds favored managers that comply with the standards. Pension funds plan to double their asset allocations to hedge funds within three years from four percent to eight percent.[16] The survey, which was conducted last month, also found that pension fund asset allocations to hedge funds are expected to double within three years from an average of 4 per cent to 8 per cent. More than 50 percent of investors said that self-certification was appropriate for the Hedge Fund Working Group standards, but that they would continue to seek independent third-party validation for greater assurance.[4]
Nine out of ten investors categorised asset valuation as "very important", yielding the highest response rate in the survey. The survey shows that the standards are not seen by investors as a panacea for their concerns around assurance. Other standards, including the Alternative Investment Management Association (AIMA)'s sound practices guide and the Global Investment Performance Standards were also cited as 'very important' or 'quite important'. This suggests that the hedge fund standards will be one of several expected by investors as the industry matures and institutionalises.[13] Investors did not see the working group standards as the sole arbiter of best practice for hedge funds, also describing the Alternative Investment Management Association's sound practices guide and Global Investment Performance Standards as very important or quite important.[4]
The firm said such an agreement would increase investor confidence, protect the industry's reputation and help avoid political interference. Organisations including the Alternative Investment Management Association and the Hedge Fund Working Group have already introduced valuation principles, but Laven Partners said they were not yet having the required impact. Jerome de Lavenère Lussan, managing partner at Laven Partners, said: "A pro-active, open approach will show visible commitment from the industry to tackle one of its biggest problems, while maintaining its independence." For more information on this article, see next week's issue of Investment Adviser (21 April).[17]
The success of the investment house, which specialises in effecting change at companies by building large stakes over time and then exerting pressure, is in sharp contrast with many hedge funds that have struggled with the worst returns for a decade. Last week, Platinum Grove Asset Management, the $5.8bn hedge fund group headed by Nobel Prize winner Myron Scholes, told investors it had suffered its worst performance since inception. London Diversified Fund Management, the $4bn hedge fund, last week told investors it would slash fees on some of its funds after market losses in the first quarter.[18] Although Silchester's performance was achieved before the problems with the credit crunch set in, the size of the pay packet is likely to raise eyebrows in the light of the hit investors in hedge funds are currently taking. Silchester, which has nearly $10bn assets under management, was set up by Butt in 1994 after he quit as chief investment officer of Morgan Stanley Investment Management.[18]
Hedge funds could receive a shake-up from the U.S. Treasury, Reuters reports. The government department has made several recommendations for the funds, advising that they provide performance reports to their investors in the manner of public companies. According to the Treasury, asset backed securities should also be better categorised by hedge funds - with attention drawn to how difficult they are to value. Problems over how much these complex financial instruments are worth has been a primary cause of the global credit crunch - which has caused the slowdown in inter-bank borrowing and lending.[12] WASHINGTON (Reuters) - The U.S. Treasury wants hedge fund managers to improve disclosure of hard-to-value assets and adopt audited public company-style performance reports for investors, a summary of recommendations, obtained by Reuters on Monday, shows. They did not propose any new regulation, but chose instead to rely on market-driven due diligence and improved disclosure.[2]
A group of hedge funds and investors in the U.S. is preparing to follow Britain's example by issueing a set of sweeping new standards aimed at reducing systemic risk and promoting investor protection, reports the FT on Tuesday.[11] In the area of risk management, the report specifically asks that senior representatives of each fund have oversight in the area of designating and monitoring risk. The Investors' Committee report set up similar guidelines for those responsible for the investment decisions of other investors, and asks these fiduciaries to set up a range of investment standards and goals that must be considered before investing in a hedge fund.[6] Among other things, fiduciaries are asked to take basic due diligence steps, fully understand the risks involves, and have a sense of fees, valuation, tax considerations and other factors. Fees for hedge funds are often much higher than those charged by more traditional mutual funds that are subject to more regulation. Russell Read, who chairs the Investors' Committee and is the chief investment officer of the California Public Employees' Retirement System, said he hopes these guidelines reflect the 'best practice insights from an investor's perspective,' and are accepted by major professional associations and as common practice among investors in hedge funds.[6]
The plan would provide a clear set of three federal regulatory bodies with authority over our entire financial system, from commercial banks to hedge funds to investment banks to public companies to insurers. This makes perfect sense to me. I prefer federal regulation to state regulation (if I move from one state to another, I want my new bank to follow the same rules as my old bank), and I think it's about time that highly leveraged, mysterious hedge funds were regulated. Except for some visibility into the public hedge funds like Blackstone (NYSE: BX ), these investment vehicles have been a complete black box. Though I like Paulson's proposed structure, I do fear that this regulatory system would encourage attempts to micromanage the economy.[19] BNP Paribas Investment Partners set out 12 years ago to develop from being just a subsidiary of a French bank with some mutual funds. Initially, it avoided large acquisitions for fear they would be destructive. Even though it has now made several strategic investments, Glicenstein remains opposed to centralization in his business: 'Unifying everything is a recipe for failure. He has seen competition grow between asset managers, on the one hand, and investment banks' proprietary traders and hedge funds, on the other. When he became chief executive about three years ago, he decided to meet this competition head on by raising his game: 'We needed to be stronger with our existing business. Not enough fund managers were aware of the financial instruments they could use.[20] Strategic investments have been a feature of BNP Paribas Investment Partners' strategy since Glicenstein became chief executive, about three years ago; the business entered a joint venture with UK fund of hedge funds manager Fauchier Partners in late 2004.[20]
In January, the working group, consisting of 14 large UK hedge fund managers published a report outlining hedge fund best practices in the five areas of disclosure, risk management, valuation, shareholder conduct and fund governance.[16] In 2007, 14 of the UK's largest hedge fund managers formed the Hedge Fund Working Group (HFWG) with the aim of establishing a benchmark of best practice in the industry and to promote self regulation.[13] "Managers can voluntarily choose to adopt the best practice standards proposed by the Hedge Fund Working Group and continue to attract significant capital inflows from institutions, or ignore the recommendations and face the very real threat of more stringent regulation being imposed upon them," Drury concluded.[13]
The Treasury group's Asset Managers' Committee, headed by Eric Mindich, chief executive of Eton Park Capital Management, calls on hedge funds to put in place more robust procedures for the valuation of assets, including written policies, segregation of responsibilities and other measures.[2]
"Company earnings growth is around 25 percent per annum and markets are trading on an average price/ earnings multiple of 10. With incentives like these, investors are unlikely to stay out of the region for long." Managers of European equity funds struggled to put a positive spin on the first-quarter debacle, though Richard Pease, manager of an equities fund for New Star Asset Management in London, said he believed there was a disconnection between the nervousness in the financial markets and events in the broader economy. "At the risk of sounding like a broken record, the message being received from company management's is different from that being broadcast by economists," he said.[21] While the risk of further volatility remains in the short term, many portfolio managers are making the most of the sell-off, focusing on companies with strong earnings outlooks and solid balance sheets that have been de-rated with the broader market. Shelley Khun, manager of an Asia equities fund at Neptune Investment Management, based in London, said she remained "very bullish" on the Chinese economy and expected about 10 percent real growth in gross domestic product this year. "The export market will be hit as the global economic environment becomes more subdued," she said, but strong investment spending "will continue to support domestic demand."[21] Paulson made the remarks Saturday to the International Monetary Fund's policy-setting panel in Washington. He told the panel that a weak housing market, high energy prices and stress in financial markets are "penalizing U.S. economic growth." An IMF economic outlook predicted a mild recession this year in the U.S. That is seen as raising the risks of a global recession to 1-in-4.[22] "Downside risks will vary, and many European and emerging market economies have stood up relatively well so far to the recent financial turmoil, but no economy is entirely immune from global forces," Paulson said.' The Treasury secretary noted the U.S. economy is undergoing a singificant housing corrrection, which together with high energy prices and financial market stress, is "penalizing" U.S. growth.[23] WASHINGTON (AFP) — The global economy faces "considerable challenges" in the shape of a slowing U.S. economy, financial market turmoil and higher inflation, U.S. Treasury Secretary Henry Paulson said Saturday.[8]
U.S. Treasury Secretary Henry Paulson has urged the International Monetary Fund to adapt quickly to the growing complexities of the global financial system and improve its monitoring of currency markets. Mr Paulson's remarks came in Washington after a weekend meeting of the Group of Seven finance ministers and central bankers, who signalled in a joint statement their concern about the dollar's slide in the past two months. "The IMF must reform to retain its relevance and legitimacy," Mr Paulson said in the text of a speech at the fund's semi-annual meeting in Washington.[24] WASHINGTON (Dow Jones)--Developing countries dealing with rising food prices should avoid price controls and subsidies to consumers, U.S. Treasury Secretary Henry Paulson said Sunday. Governments experiencing "severe negative shifts in the terms of trade due to higher commodity prices" should consider policies that reduce energy demand or targeted programs to help those in need, Paulson said in prepared remarks to the development committee of the International Monetary Fund and World Bank.[25] Speaking against a backdrop of growing concern over sharp rises in food costs for the poor, Paulson said the gains in commodity prices had produced large beneficial shifts in the terms of trade for many developing countries. For these countries, it "is essential to translate this boom into the foundations for higher sustainable growth," he said. For those that have suffered as a result of soaring commodity prices, such as for oil, Paulson said they "may need to implement better energy demand policies and targeted safety net programs." Such countries should also "resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups." Rising commodity prices, especially for food, were put in the spotlight here Saturday when the head of the International Monetary Fund warned they could lead to conflict if not tackled. "Food prices, if they go on like they are doing today. the consequences will be terrible," IMF managing director Dominique Strauss-Kahn said. "As we know, learning from the past, those kind of questions sometimes end in war," he warned. Robert Zoellick, head of the World Bank -- whose mission is to promote development and so reduce poverty -- called earlier this month for a 'New Deal' on food, similar in scope to a 1930s program under U.S. president Franklin D. Roosevelt that tackled the problems of the Great Depression.[26]
Paulson also suggested that international groups may be able to help countries lessen the impact of rising food prices. While he was not specific, World Bank President Robert Zoellick last week said his group would nearly double its food aid lending program this year. Paulson said that while higher food prices are hurting some, exporting nations have benefited in the form of higher profits for their exports. Paulson reiterated a point made in this year's Global Monitoring Report that rising profits should be soundly managed so they can become a foundation for more sustainable long-term growth. Paulson praised developing nations for being on track to have their sixth consecutive year of average GDP growth above 6 pct. He said increased private investment, sound macroeconomic policies, and increased trade would help developing nations continue on the path of solid growth.[27] Food prices are expected to reach a peak over the next couple of years, but remain well-above 2004 levels due to a lack of extra supply to meet rising demand. For commodity-exporting countries that are benefiting from the price boom, Paulson said he supports World Bank recommendations that the windfall go toward creating "the foundations for higher sustainable growth." Cutting trade barriers would also help reduce poverty, he said.[25]
Washinton, DC (AHN)- U.S. Treasury Secretary Henry Paulson said Sunday developing countries have benefited greatly from higher commodity prices in past years and chalked up unparalleled growth rates above six percent, AFP reported. "Developing countries are on track to record their sixth consecutive year of average growth in excess of six percent, an accomplishment unparalleled in recent history," AFP quoted Paulson at a World Bank spring meeting. This despite the risk associated with the U.S. economic slowdown.[28] WASHINGTON (Reuters) - Treasury Secretary Henry Paulson warned on Sunday that governments should resist temptation to try to control soaring food costs through price controls, which he said would likely make the situation worse. In remarks prepared for delivery to the World Bank's development committee, Paulson said such measures were "generally not effective and efficient" at protecting people likely to suffer the most. "They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries," Paulson said. World Bank President Robert Zoellick warned earlier this month that soaring food and energy prices were a serious concern that threatened to foster social unrest in an estimated 33 countries.[29]
"Governments, however, need to resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups," Paulson said. "They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries." World Bank President Robert Zoellick called Thursday for a "New Deal" on global food policy to address hunger and rising food prices, which he warned could mean "seven lost years" in poverty-reduction efforts.[25] Paulson said price controls and subsidies "tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.'' "Governments of countries that are experiencing severe negative shifts in the terms of trade due to higher commodity prices, including higher food prices, may need to implement better energy demand policies and targeted safety-net programs while considering longer term measures, such as promoting sustainable energy development and agricultural growth,'' Paulson said. Consumer-price inflation in poor or so-called developing countries will accelerate this year to 7.4 percent, compared with a January forecast of 6.4 percent, the IMF said last week.[30]
WASHINGTON (Thomson Financial) - U.S. Treasury Secretary Henry Paulson on Sunday warned developing countries to avoid setting price controls in response to rising food prices, which he said can be ineffective, and said these countries should instead address the problem by seeking international aid and undertaking certain economic reforms.[27] The nation's economic policy heads outlined sweeping recommendations to strengthen the nation's credit markets, calling for stronger licensing standards for mortgage brokers, more due diligence from credit-rating agencies and stronger trading systems for complex instruments in an effort to avoid another credit meltdown. "Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Treasury Secretary Henry Paulson said during a speech at the National Press Club. "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth."[31] While the United States announces measures to revamp its financial system and a restructuring plan is unveiled for Canadian retail investors stung by debt vehicles, people are questioning how responsible investors should be for their own misfortunes. In the U.S., Treasury Secretary Henry Paulson has introduced reforms that would give its central bank, the Federal Reserve, more power over that country's financial industry, which has been reeling in the wake of the subprime mortgage housing disaster and the asset-backed commercial paper crunch. Purdy Crawford, the man in charge of cobbling together a plan to rescue Canadian holders of frozen non-bank ABCP, got a rough ride from retail investors who seem inclined to take their chances in court rather than get a portion of their money back now or wait seven years for full restitution.[32] ANZ chief executive Mike Smith says ratings structures confuse investors, and need changing. He applauds the Australian regulators as "the best in the game" - and backs U.S. Treasury Secretary Henry Paulson's move to extend the powers of the Federal Reserve.[33]
The committees, led by officials from Calpers, the biggest U.S. pension fund, and Eton Park Capital Management LP, were the product of a review by the Treasury, Federal Reserve and other regulators last year.[1] While that concern is warranted, most of the funds are interested in playing by the U.S. government's rules, which will protect the American economy, Kimmitt said. Foreign investments, including those by companies as well as sovereign funds, have triggered concerns in the United States about foreign influence or control of domestic assets. In one such case, opposition from the Treasury's Committee on Foreign Investment in the United States blocked a $2.2 billion bid for U.S. network equipment maker 3Com Corp. (COMS.O: Quote, Profile, Research ) by China's Huawei Technologies Co Ltd HWT.UL and private equity firm Bain Capital Partners.[34] NEW YORK, April 14 (Reuters) - Sovereign wealth funds have been a force for good in the global economy, but their rapid growth warrants a vigilant stance by the U.S. government, Deputy Treasury Secretary Robert Kimmitt said on Monday. "The number of funds and holdings is at a point, and will grow such, that vigilance is required that they continue to be a positive influence and we don't see rising protectionism," he said at a panel discussion put on by the Asia Society in New York.[34] U.S. Treasury Secretary Henry Paulson warned Saturday that the global economy faces a "more difficult year" in 2008 after recent years had favorable conditions. His remarks came after Paulson hosted a meeting of G7 central bankers and finance ministers at which they expressed concern about the dollar's slide vs. other currencies.[23]
Regarding the global economy, Paulson said 2008 will be "more difficult" than recent years, with "headwinds coming from adjustments in the U.S. economy, financial market stress, and higher than desirable inflation." He said he was confident about long term U.S. prospects and the resilience of capital markets, but "we must expect more bumps in the road." "It took time to build up recent excesses and it will take time to work through the consequences," Paulson said.[9] Challenges will come from adjustments in the U.S. economy, financial market stess, higher commodity prices and inflation, Paulson said, in remarks prepared for a meeting Saturday of the the International Monetary and Financial Committee, which advises the board of the International Monetary Fund.[23] "2008 will be a more difficult year, with headwinds coming from adjustments in the U.S. economy, financial market stress, higher commodity prices, and higher than desirable inflation," Paulson said, according to the text of his address.[8]
Paulson said that after several years of "what, in retrospect, was unsustainable home price appreciation, the U.S. economy is undergoing a significant housing correction." The fallout puts all the risks on the downside and the U.S. authorities have responded with a series of measures, including increased spending, to cushion the blow, he said. "It took time to build up recent excesses and it will take time to work through the consequences. We must expect more bumps in the road," he said, citing the correction in the markets and reassessment of risk since August.[8]
Paulson called on the World Bank to help low- and middle- income nations promote economic growth, trade and investment. "Trade reforms are critical means to lifting people out of poverty,'' he said. Paulson also reiterated his view that while U.S. economic growth will probably slow, the long-term outlook is sound. "The housing correction, credit-market turmoil, and high oil prices are all weighing on growth and short-term risks are to the downside,'' he said.[30] Rising commodity prices over the past several years have "generally produced large beneficial shifts in the terms of trade for many developing countries,'' Paulson said. He endorsed a World Bank development committee report recommending "sound management of these windfall revenues'' to ensure sustainable growth.[30] 'Governments. need to resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups,' Paulson told the World Bank's Development Committee. 'They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries,' Paulson said of price controls.[27]
Record prices for commodities from crude oil to rice are causing food shortages and political unrest in poor countries and increasing concern elsewhere about inflation. Paulson said improvements in agriculture and energy conservation are better policies to pursue than government-imposed measures to contain prices, which he said may exacerbate problems. Paulson delivered his remarks at the semiannual meetings of the International Monetary Fund and World Bank.[30] Global food prices surged 57 percent last month from a year earlier, according to the United Nations, and the World Bank warns civil disturbances may be triggered in 33 countries.[30]
"A good example would be McDonald's Japan, which is expanding rapidly." His other stock picks included Unicharm Petcare and Kurita Water Industries. With talk of recession on everyone's lips, few investors will be rushing back into equity markets during the second and third quarters, but will they be rewarded by sticking with gold and bonds? Daniel Sacks, who manages a global gold fund for Investec Asset Management in South Africa, said he expected the gold price to tread water for a while, especially if the reversal from gold into dollars continued. "The target price of $1,000 an ounce was probably reached too soon in the year," he said. Supply fundamentals for gold and other precious metals like platinum remain encouraging, he said. Sacks favors midsize producers with rising output, especially those that have not hedged their production targets.[21] David Tepper, founder of hedge-fund firm Appaloosa Management LP, saw a negative 17% return last quarter in two funds with more than $6 billion in assets combined as bets on distressed debt went awry, according to fund documents. His Appaloosa Investment and Palomino funds gave up most of that ground in January and February, as declining prices for mortgage-backed bonds and other debt investments caused broad credit-market seizures. It marks a rough start to the year for Mr. Tepper, 50 years old, one of the industry's best-paid.[35]
Two advisory panels Tuesday released separate reports for the President's Working Group on Financial Markets that call for new business practices in the hedge-fund industry, an industry that has grown to 8,000 funds with close to $2 trillion in assets. "As these recommendations.[36] WASHINGTON -- Treasury Secretary Henry Paulson called on the hedge-fund industry to implement new business guidelines released Tuesday, saying they will help improve ailing financial markets.[36] In response to the bailout, treasury secretary and former executive investment banker Henry Paulson proposed a regulatory package ostensibly designed to address many of the problems in the financial markets.[37] WASHINGTON (MarketWatch) - The financial market crisis is not over and further trouble may lie ahead, Treasury Secretary Henry Paulson said Friday[38]
Unfortunately, it is comprehensive only if the interests of investors are deemed to be ancillary to the competitiveness of American financial institutions in global financial markets. It has precious little to do with the role of regulators in assuring that those same institutions meet their fiduciary obligations to the people who entrust their money to them. Perhaps this should come as no surprise given that the Paulson report originates from a conference on capital market competitiveness convened by the Treasury. I read this tome and came away with a sick feeling in my stomach that Mr. Paulson views investors as factors of production rather than as clients to be served.[39] Arab Bank has signed with Allianz Global Investors an investment advisory agreement aimed to enhance Arab Bank investment services offered in international financial markets and to provide investors in the markets where the bank and Arab Bank Group operate with safer investment options.[7]
The chairman stressed that Arab Bank's top management attaches so much importance to the risk management aspect in investment. He noted that Arab Bank profile funds are the first in the world to consist of all seven investable asset classes. They include AB Defensive Fund, a defensive vehicle, AB Conservative Fund, AB Balanced Fund, AB Growth Fund with allocations weighted towards equity and commodities funds and AB Dynamic Fund, which invests a large proportion of its assets in global equity funds.[7] Shoman added that Arab Bank, which was established in 1930, has contributed to the development the Arab Banking industry, offering world-level banking services and products. The bank, he said, has penetrated international markets with quality income-generating services that conserve assets and develop them in line with a well-calculated risk management policy that has resulted in the past decades in increasing return on investment, avoiding the repercussions of fluctuations in exchange and stock markets, overcoming crises and achieving constant growth in assets and profits from investments.[7]
On February 27, 2008, OTP Asset Management received from CNVM the decisions of authorizing the three Open- Ended Funds: OTP AvantisRO, OTP BalansisRO and OTP ComodisRO. OTP AvantisRO is an Open-Ended Fund with 80% investments on the equity market and 20% investments in bank deposits, current account, bonds and fund units in order to obtain superior yields on medium and short term. OTP BalansisRO is an Open-Ended Fund with a balanced portfolio due to its investment of 50% in fixed income instruments and 50% in equities in order to obtain higher yields than bank deposits. OTP ComodisRO is an Open-Ended Fund which invests 90% of its assets in money market instruments, such as bank deposits, T-bills and 10% in bonds for stable yields and a very high degree of liquidity. Through this line of investment products, OTP Asset Management intends to cover the local market trends regarding risk tolerance, thus addressing to all individual and legal entities from Romania and abroad which prefer to diversify their own investments.[40]
Eight months later, BNP Paribas has had the last laugh, according to Alain Papiasse, a member of the bank's executive committee and head of BNP Paribas Asset Management and Services, the overall asset management arm that includes Glicenstein's institutional client and mutual fund business. The bank has avoided the writedowns suffered by most of its rivals. BNP Paribas Asset Management and Services has reinforced its position as the world's 15th largest asset manager by increasing its assets under management by 8% to '584bn ($925bn).[20] In terms of pre-tax profit, Asset Management and Services contributed almost '430m in the final three months of last year, more than a quarter of the bank's total, and more than investment banking. Glicenstein's unit this month bought the UK's IMS Group, a multi-manager firm that invests '6.5bn of client capital with selected traditional asset managers.[20] The others include a private bank; a personal investors unit, including an online financial investment and brokerage business; real estate asset management and property development; an insurance business; and a custody and securities settlement service.[20]
Espen Baardsen, manager of a European equity fund for Eclectica Asset Management, based in London, was one of the few mainstream managers with cause for celebration last quarter. He was underweight in financials and overweight in agriculture stocks, which continue to benefit from food price inflation.[21] Stock picks include Kinross Gold in Toronto, Randgold Resources South Africa and Lihir Gold of Australia. Sacks is also bullish on platinum, which he considers "a bargain at current price levels." His picks include Impala Platinum and ETF Platinum. Ian Henderson, London-based manager of a natural resources fund for JPMorgan Asset Management, is also bullish on gold, though he admitted that because the price was largely driven by sentiment it was one of the most difficult commodities to forecast. His preferred company in the segment is Barrick Gold.[21]
KPMG commissioned an independent research firm to interview pension funds, funds of hedge funds and investment consultants with total assets under management or advice of around USD400bn. [4] The survey was conducted over a 10-day period in March 2008. It found that pension funds are expected to double their asset allocations to hedge funds from an average of 4 per cent to an average of 8 per cent within three years.[13] The survey also revealed more than half of the pension funds surveyed would require hedge fund managers to comply with the standards within three years, Director of Finance online reports.[14] UK - Hedge funds will have to comply with best practice standards to win institutional mandates over the next three years, according to a KMPG survey of the country's largest pension funds.[15]
The move follows the UK, which last year unveiled the world'''s first voluntary regime for industry conduct. Under that plan, which is supported by the 14 largest managers in London and is due to take effect at the end of the year, hedge funds would have to "comply or explain''', agreeing to meet the standards or tell people why they were not meeting them.[11] After returns of 12.56 percent last year and 13.86 percent in 2006 according to Credit Suisse/Tremont, the $2.5 trillion (R20 trillion) hedge fund industry has been hit by volatile markets, investor redemptions and prime brokers paring back leverage.[41] Last month, a report by accountancy firm PwC and research firm the Economist Intelligence Unit concluded that investors are not happy with levels of regulation in the hedge fund industry and have called for greater transparency and accountability.[16]
Hedge funds are vast pools of capital that operate secretively and with very little government supervision and have grown explosively in recent years. While they cater to institutional investors and very wealthy individuals, millions of ordinary people invest in them through their pension plans. The Bush administration has resisted pressure to increase government regulation, arguing that market discipline is the best way to handle these funds.[42] Over the next three years, more than half of UK pension schemes intend to invest only in hedge funds that adhere to the Hedge Fund Working Group's standards, found a survey by KPMG.[16]
Tom Brown, head of KPMG's investment management and funds practice in Europe, said the results indicated that hedge fund managers should have an incentive to sign up to the standards in order to attract institutional money.[16] The interest highlighted in the Blueprint is how to prevent credit risks to the market as a whole. Hedge funds can become significantly leveraged and they often concentrate huge sums in single investments - as was the case with Long-Term Capital Management.[43] The report also asked for improvements to risk management techniques, more checks and balances within the operating structure of hedge funds, and a 'written code of ethics and compliance manual' to address possible conflicts of interest.[6]
As examples, it asked hedge funds to create a risk profile for hard-to-value assets that considers whether assets may be hard to liquidate, at risk for losses due to market changes, or whether there are undue risks because of incompatibilities between a hedge fund and the operational set up of a fund manager.[6] '''We must diversify our range of asset exposure. In the future, they should include private equity, hedge funds and real estate ''' all these so-called alternative investments.''' As the fund turns more global and proactive in outsourcing, Chu hopes that global asset managers will increase their presence on the island and help raise its financial sophistication and build up the local talent pool.[44]
The report recently released by the Department of the Treasury suggests that the federal government create a new regulator to oversee the "chartering and licensing" of hedge funds and other financial firms.[43] The Blueprint proposes new Federal Financial Service Provider (FFSP) charters whereby the federal government would register heretofore-unregistered hedge funds.[43]
The Blueprint creates a specific charter and license for each financial service product including hedge funds. It also calls for a new regulator to cultivate information that would be useful in monitoring the market to avoid a credit catastrophe. Have a comment? Let us know what you think of this or another CCH Wall Street story by clicking here.[43] The Blueprint also calls for the creation of a new type of agency, the Conduct of Business Regulatory Agency ("CBRA"), to act as a regulator of a wide array of financial vehicles and organizations, including hedge funds.[43]
The CBRA would be charged with creating appropriate charters for hedge funds that would set "national standards, in terms of financial capacity, expertise, and other requirements, that must be satisfied to enter the business of providing financial services," according to the report.[43] The Hedge Fund Standards: Final Report prepared by a working of 14 mainly London-based hedge fund managers and published in January 2008 can be downloaded from the Hedge Fund Standards Board website at www.hfsb.org.[3]
Giles Drury, senior manager, KPMG's Alternative Investment Group, commented: "The hedge fund industry is at a turning point.[15] "People have been shocked by the severity of the excesses caused by self-regulating mechanisms,'' said Robbert Van Batenburg, head of research for Louis Capital Markets, a broker whose clients include hedge funds, in New York. "It's going to be difficult for regulators to keep pace with the industry. It's extremely hard to regulate.''[1] Presently, hedge funds do not have to register with the SEC. But hedge funds have been in the sights of regulators for a long time, and especially since the collapse and financial bailout of Connecticut based hedge fund Long-Term Capital Management, which famously lost $4.6 billion in one month in 1998.[43]
In 2004, the SEC passed a rule that required a large portion of hedge fund advisers to register with the SEC. Hedge funds generally operate with two entities, a pooled fund that is labeled as a partnership or LLC, and a separate investment adviser company that will only have one client - the pooled fund. Investment advisers do not have to register with the SEC if they have less than 15 clients and the clients are qualified investors.[43] In comment letters and court documents, critics of the SEC rule claimed that registration would put hedge funds out of business for two reasons. If hedge funds disclose their strategies they will lose the opportunity to exploit price differentials across markets to other investors.[43] Under the 2004 rule, the SEC could "look through" the pooled fund to find more than 15 clients, forcing more of the hedge funds to register. Phillip Goldstein of Bulldog Investors, a New Jersey hedge fund, challenged the SEC rule on the grounds that the SEC was changing the definition of "client" for this one issue and that the rule was therefore arbitrary.[43]
One set of the recommendations was prepared by hedge fund managers and the other set was put together by investors who use the funds.[10] London - More and more top hedge fund and private equity managers were set to move to new firms as the credit crisis bites, according to speakers at last week's Reuters Hedge Fund and Private Equity Summit in London. Life has become tougher for both hedge funds and private equity in recent months, as debt, which has fuelled both industries in recent years, has become harder to obtain and market volatility has hit returns. This is squeezing talented fund managers in many firms, either because their firms are finding it harder to reward them adequately in these tougher conditions or because their funds have suffered as market conditions worsen.[41] A number of U.S. hedge funds have been driven to the wall already this year with the drying up of credit and liquidity in a range of markets.[4]
Hedge funds are important to the market because t hey contribute substantially to market efficiency, price discovery, and liquidity. Many hedge funds are now heavily leveraged as they focus on timing trades, and as a result can pose a credit risk to the market.[43]
More regulation for investment vehicles deep within the financial system, such as hedge funds and derivatives.[19] According to the survey, investors remain skeptical, with only four in 10 investors believing the majority of hedge funds will agree to the standards in the near term.[16]
Paulson, Fed Chairman Ben S. Bernanke and the heads of the Securities and Exchange Commission and Commodity Futures Trading Commission in February 2007 judged that market discipline remained the best way to protect investors and guard against risks to the financial system. Paulson appointed the outside panels to help the industry develop recommendations for fund managers and investors to ensure market participants understood risks and how to manage them.[1] Paulson, who heads the President's Working Group on Financial Markets, said that the recommendations emanate from seven months' work by the group, which is comprised of the heads of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the New York Federal Reserve Board and the Commodity Futures Trading Commission.[31] Federal Reserve Chair Ben Bernanke called the recommendations an "appropriate and effective response to deficiencies in our financial framework that contributed to the current turmoil in financial markets," in a statement. Securities and Exchange Commission Chairman Christopher Cox said that the agency would use its new authority to address rating agency issues to restore investor confidence. "This effort is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to and are prosecuting them.[31]
European bank stocks were a no-go zone for investors in the first two months of the year, but an encouraging rally in March, following the bailout of Bear Stearns in the United States by JPMorgan Chase and the Federal Reserve, has stimulated renewed interest in the sector. "There are still concerns about the health of the sector, and these will remain until market liquidity improves," said Chris Iggo, a senior strategist at Axa Framlington in London. "However, banks will be much sounder investments because their asset quality will be higher and their credit rating stronger.[21]
Glicenstein, chairman and chief executive of BNP Paribas Investment Partners, the bank's institutional and mutual fund asset management arm, had to return to Paris to calm everybody down.[20] For 2008, OTP Asset Management considers to actively position itself on the investment funds market.[40] The major shareholders of OTP Asset Management are OTP Fund Management Hungary, which holds 90,1% of the total shares and OTP Bank Romania, with 9,9% of the total shares.[40] "A shrinking Japanese work force and an increase in the number of employees on short-term contracts, which pay significantly less than permanent contracts, are serious economic stumbling blocks," Chris Taylor, manager of a Japan fund for Neptune Asset Management, explained.[21] Requirements for fund managers include a minimum three-year track record above the fund'''s designated benchmark, assets under management of at least $25 billion, and a minimum three-person local service team.[44]
As investment markets become more international and grow deeper, sticking with outdated risk management and restrictive asset allocations translates to low returns, Chu says. Drawing examples from pension managers in the U.S. and Canada, Chu says Taiwan should set its sights on opportunities in offshore investments and expand the set of investment tools available to its pension managers.[44] Valuation, followed by risk management and then disclosure, were cited by respondents as the most important issues addressed by the standards. Tom Brown, European head of the KPMG investment management and funds practice, said the results provided a compelling case for managers to sign up to the standards, particularly if they were expecting to attract institutional money.[14] Over 50% of funds said it was imperative managers complied with best practice standards with 80% of funds currently favouring managers which complied. Tom Brown, European head of KPMG's Investment Management & Funds practice, commented: "These results provide a compelling case for managers to sign up to the Standards, particularly if they are expecting to attract institutional money."[15]
"The fund must spring quickly and far to adapt to rapid technological change, the rise of dynamic emerging market economies and the increasing internationalisation of financial markets." Mr Paulson said the IMF must "sharpen its focus" on currency markets. "Fundamental to the IMF's relevance is the vigour with which it carries out its core mission of surveillance over members' exchange rate policies," he said. Monitoring the rising influence of government-run investment funds -- or sovereign wealth funds -- is also a priority, he said. The IMF is scheduled in August to release its guide of best practices for sovereign wealth funds.[24] The report "reinforces our belief that a combination of robust market discipline and regulatory policies best protect investors and mitigate systemic risk," Paulson said in a statement. "Both market and regulatory practices will evolve from here, but this is certainly a logical step at this time." The recommendations will be open for public comment for 60 days, at which time the committees will review and, as necessary, revise these best practices and standards.[5] WASHINGTON -- Separate reports by two advisory panels, slated for release Tuesday by Treasury Secretary Henry Paulson, call for changes on the part of hedge-fund managers and investors to reduce systemic risks and give investors more information, including on hard-to-value holdings.[45] Treasury Secretary Henry Paulson says that while risks remain, the Bush administration is dealing aggressively with the U.S. economic slowdown.[22] April 13 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson advised developing nations struggling with soaring commodity costs against using price controls because they may do more harm than good to long-term economic growth.[30]
In recent months, rising food costs have lead to violent protests in Egypt, Cameroon, Ivory Coast, Mauritania, Ethiopia, Madagascar, the Philippines, Indonesia and other countries in the past month. Paulson did not refer directly to these issues in his address but noted that "a key challenge for the international financial institutions is to assist those countries whose growth is lagging." Trade helps economic growth and so "trade reforms are (a) critical means to lifting people out of poverty," he said, referring to ongoing international liberalization talks.[26] Paulson, addressing the spring meeting of the International Monetary and Financial Committee, said global growth had been favorable in past years but circumstances had now changed in the fallout from the U.S. home loan crisis.[8]
In releasing the findings of the group's research, Paulson said there is a need to guard against systemic risk in order to keep the U.S. financial markets competitive.[5] The President'''s Working Group on Financial Markets in the U.S. was formed in 1988 to enhance '''the integrity, efficiency, orderliness, and competitiveness''' of U.S. financial markets and to maintain '''investor confidence'''.[3] The report was prepared over the course of the past year and isn't some hastily drafted response to the credit market meltdown and growing crisis of investor confidence in financial markets. It is a serious document intended to be the basis for comprehensive regulatory reform.[39] Financial markets evolve much faster than regulators can. Was anyone even talking about Structured Investment Vehicles a year ago? This speedy, consistent change has made our financial regulatory system a confusing morass of various overlapping state and federal regulators, each developed to deal with previous innovations.[19]
Paulson took office at Treasury in 2006 and quickly began speechifying about the lack of efficient financial market regulatory mechanisms. He argued that the existing regulatory mechanisms focused too much on the conduct of business rather than the financial side of the operations.[37]
For a bank like ours to be AA is a big issue. "We should have different ratings systems for these things." He supports Mr Paulson's plan to bring the whole financial services area within a regulatory framework that would enable the Federal Reserve to extend it to areas or issues that appeared problematic.[33] As it stands, the plan would create two new federal regulatory agencies, one for insurance and another for mortgages while giving the Federal Reserve greater control over the investment banking sector. Combined, the regulatory plan seems destined to limit state control over setting insurance policy and provides federal regulatory bodies with the foundational legal teeth they will need to actually limit some of the risks potentially harmful to the economy as a whole. Therein lies the most interesting part.[37] The CBRA would be a part of a new regulatory framework that integrates the Federal Reserve, the Treasury Department, the SEC and existing self-regulatory entities.[43] The Wall Street bred Treasury Secretary in a Republican administration is arguing for greater federal regulation of the largest and most politically influential companies. As the country prepares to elect a new president, one many believe will be a democrat, the federal government's regulatory agencies will actually have a lot of sharp teeth and for that, the Democrats can thank their Republican counterparts. Passing the regulations now, when they are proposed by a Republican administration, will give the Democrats the appearance of bipartisan political agreement should they assume control of the executive branch in January 2009. They will be far more immune to criticism from the right about government regulation when they are merely enforcing rules proposed by a Republican administration.[37] For the sake of efficiency, the Treasury secretary is willing to sacrifice truly independent regulatory oversight. This is further evidence that the best interests of investors are deemed to be subordinate to those of the industry.[39]
The correct regulatory paradigm is founded on principles of professionalism. Investors must rely upon people and institutions they can trust. People trust those who are bound by an obligation to subordinate their own financial interests to those of their clients. Of course, not all financial service entities are fiduciaries held to such high standards of responsibility, but certainly those who provide financial advice or take discretion over client assets are. These professionals are heavily relied upon by investors to help select non-fiduciary providers. They are much better equipped to decipher complicated disclosures and unravel conflicted affiliations than are most end investors. The brief segment of the blueprint that substantively addresses fiduciary standards of care includes the following statement: "Broker-dealers, while subject to strong standards of conduct and'suitability' requirements, generally are not fiduciaries of their clients and thus are perceived by some as having weaker obligations to customers."[39] BNP Paribas Personal Investors had '37bn in assets under management in December. Its 4,100 staff in 10 countries service more than 1.5 million clients, 80% of them in Europe, whom it advises and provides with trading services. The unit has established a team of 180 mobile bankers in Germany, giving face to face advice to clients, and Vincent Lecomte, deputy head of BNP Paribas Personal Investors, said he hopes to expand this to 600 mobile bankers in Europe by 2010.[20] Glicenstein's BNP Paribas Investment Partners is only one of six business lines that comprise BNP Asset Management and Services, overseen by Papiasse.[20] OTP Asset Management SAI SA, member of OTP Group, one of the largest financial groups in Central Eastern Europe, starts its operations on the Romanian market and launches its first investment products.[40]
Arab Bank Group offers retail and corporate financial services and serves government agencies and international financial institutions. It also provides investment banking, private banking and wealth management.[7]
At last week's AsianInvestor Annual Offshore Investment Forum, Chu Wu-Hsien, management board chairman of the $17.49 billion Public Service Pension Fund in Taiwan, said offshore investments and innovative tools will underpin future pension fund development worldwide.[44] The Public Service Pension Fund manages a combined TW$530 billion ($17.49 billion) in assets, made up of TW$400 billion ($13.20 billion) in civil service pensions and TW$130 billion ($4.29billion) in insurance contribution from public school teachers.[44]
To date, the fund has outsourced overseas investments in three batches. The mandates it issued in 2003 have produced successful results, and set an example for the three other public funds in Taiwan to follow ''' they are, the Labor Insurance Fund, Labour Pension Fund and Taiwan Postal Fund later. These outsourced mandates have proven to be a rite of passage, as the fund graduates from the basic balanced portfolio to one than invests in global equities and fixed income products. '''We are expanding the scope of investment tools in both our direct and outsourced portfolios,''' Chu says.[44]
Brown continued: "Markets may go up or down, but pressure on managers for increased investor assurance and transparency will only go up." Over half of pension funds said they would be satisfied with self certification of the standards, but would seek third party validation for greater assurance.[15]
Middle East equity funds remained mostly flat by the end of the quarter, though funds invested in Kuwait and Oman bucked the trend and made money for investors in the period. Both markets are viewed by Arab regional funds as defensive investments; they have little exposure to foreign investors and are heavily biased toward the petrochemical sector, which continued to track upward in the three months to the end of March. Commenting on the wider Middle East region, Haissam Arabi, managing director of Shuaa Capital Management in Dubai, said the sell-off in India and China had spilled over into liquid markets like the United Arab Emirates and effectively cut short their rally.[21] Allianz Global Investors AG (AllianzGI), a subsidiary of Allianz SE, is a management holding company for a network of investment specialists in the most important institutional and retail markets around the world. Through PIMCO, RCM, Oppenheimer Capital, NFJ, Nicholas-Applegate and several other specialist firms AllianzGI offers its clients a broad variety of investment competencies, covering all equity and fixed income investment styles as well as balanced products and alternative investments.[7]
'''We have had numerous discussions with global banks and asset management houses. Few have been able to tell me whether the crisis is over, and whether they expect to make or lose money this year,''' he adds.[44] At the end of last year it had '278bn of assets under management, according to the bank's accounts, more than twice as much as five years ago; and 2,250 employees in 30 countries.[20]
Now, policy makers acknowledge that stronger regulation of financial markets is needed in the aftermath of the $245 billion of asset writedowns and credit losses that financial companies have logged since the start of last year.[1] The funds have assets between $1.9 trillion and $2.9 trillion, and could grow to $15 trillion in the next eight years, the Treasury has estimated.[34]
The SEC might ask for a list of assets, but assets in hedge funds often change daily, so a list of assets is out of date as soon as it is written down.[43] Lion Capital, the private equity house that owns Weetabix, said it had bought the stake. Focus also sold its 30 per cent stake in Schulthess Group, a washing machine manufacturer, causing the stock to fall nearly 20 per cent. Other stocks owned by Focus - including Forbo, a flooring company, and Huber & Suhner, the Swiss maker of wiring used in the Eurofighter combat jet - also fell as the hedge fund sold its stakes.[18] Focus Capital, an award-winning US-based hedge fund that collapsed recently, is being investigated by Swiss regulators looking into irregular trading.[18]
Mr Smith said it was not possible to stop people abusing laws. "But you need to create a framework which is a good environment in which to work," he said. Regulatory structures around the world had lagged the development of markets at times, he said, particularly of fringe players in those markets. "That's always where the problems come, from institutions that are not regulated but which are competing with those that are." Hedge funds and some private equity businesses at times came into this category.[33] Stephen Butt, chairman of Silchester International, the activist London-based hedge fund, paid himself over £23m in one of the most lucrative pay deals of the year.[18] The hedge fund sector as a whole is worth almost $2 trillion, Reuters reports.[46] The hedge funds standards board was established to act as custodian of the standards.[13] Associated Press - April 15, 2008 4:33 AM ET WASHINGTON (AP) - The Bush administration is coming out with some industry-developed 'best practices' to guide the operation of hedge funds[42] Increased paperwork and filing would slow down the transactions of hedge funds, and eliminate the opportunities to act on price anomalies.[43] Fund of hedge fund group Laven Partners has called for a standardised hedge fund valuation agreement.[17] According to data from the BarclayHedge Fund index, the average hedge fund lost 4.4 percent in the first quarter.[41] The other criticism was that SEC is not capable enough to understand what hedge funds actually do, and could not provide any meaningful oversight.[43]
In January 2008, following an extensive consultation process, the HFWG published a report outlining 28 principles for best practice, which cover five key areas - disclosure, risk management, valuation, shareholder conduct and fund governance. [13] Specifically, the PWG recommended strengthening the credit markets in the following areas: transparency and disclosure, risk awareness, risk management, capital management, regulatory policies, and market infrastructure.[31]
Paulson said the IMF, in implementing a new surveillance regime, must use clear analytics and make strong judgements on exchange rate policies, "particularly where currencies are not set by market forces in deep, liquid markets." "The IMFs implementation of the new surveillance decision is still a work in progress," he said in prepared remarks before the IMFs steering committee in Washington. "Strengthened implementation of this core mandate is integral to IMF legitimacy; insufficient progress would put success of the broader modernization effort at risk." Paulson also repeated his long-standing call for continued progress in reforming the IMFs governing structure, including a smaller, more streamlined board, with gradual reductions to 20 seats from 24 currently by 2012. "The board is simply too costly and a smaller and more streamlined board could focus more strategically on the management of the institution and less on the voluminous crush of papers," he said.[9] If the Fed loans money to investment banks, then it logically follows that the central bank ought to have a say in how the investment banks spend it. The Fed wants to have greater control over the risks investment banks take, especially if those risks might create macroeconomic problems down the road. All told, Paulson's plan seems designed to accomplish both key objectives by strengthening the power of federal regulators of insurance and mortgage backed securities.[37] Noting that the World Bank and other multilateral lenders are financing a shrinking share of investment projects, Paulson warned that the institutions are losing leverage in promoting environmental sustainability. The World Bank "needs to continue to emphasize its core mandate while becoming more creative in utilizing the linkages between environmental trends and poverty," he said.[25] Food prices will probably remain comparatively high until at least 2015, the World Bank said in a separate report.[30] Surging food prices could mean "seven lost years'' in the fight against poverty, World Bank President Robert Zoellick said April 11. "While many are worrying about filling their gas tanks, many others around the world are struggling to fill their stomachs,'' Zoellick said at a press briefing in Washington.[30]
The World Bank has similarly advised that, despite the fact that several countries are trying price controls to curb food costs, it is unlikely to be effective in the longer term.[29]
Paulson said countries suffering "severe negative shifts in the terms of trade due to higher commodity prices including higher food prices" should focus on policies to control energy use and consider measures to boost agricultural production. "Governments, however, need to resist the temptation of price controls and consumption subsidies that are methods of protecting vulnerable groups," he said.[29] The report said Paulson cited gains in commodity prices had produced large beneficial shifts in trade for many developing countries. Paulson said those countries that have suffered as a result of soaring commodity prices need to implement better energy demand policies and targeted safety net programs.[28]
Rather than setting price ceilings on food, developing nations hit hard by rising prices 'may need to implement better energy demand policies and targeted safety net programs,' Paulson said. He said they need to consider longer term measures such as increasing agriculture production and energy development.[27]
There may be more bumps in the road," Paulson said in a statement to reporters at the conclusion of the meeting of G7 finance ministers and central bank governors. Paulson stressed that the Bush administration is not sitting on its hands as the U.S. economy slows.[38] Paulson and Federal Reserve Chairman Ben Bernanke have been trying to reassure officials that U.S. policymakers are doing everything possible to loosen U.S. credit markets. That would enable businesses and consumers to get loans more easily and help the economy revive. This material may not be published, broadcast, rewritten or redistributed.[22] The goal of the Blueprint is to limit risk in the market and to identify potential credit crises that the Federal Reserve can attempt to mitigate, according to the report.[43]
"What we have to do is find a better balance between market discipline and regulation,'' New York Federal Reserve President Timothy Geithner said in Washington during meetings of the International Monetary Fund April 12.[1] The nation's financial sector seemed on the verge of collapse when the giant investment bank Bear Stearns needed a bailout from the Federal Reserve to avoid bankruptcy.[37]
A number of people feel financial institutions should not be bailed out by governments with taxpayer money for participating in, and in some cases creating, what has resulted in the worst housing and financial crisis in decades. Many observers feel people should have to live by the rule "investor beware," whether they are homebuyers who took on mortgages they knew they couldn't pay off or people who invested in asset-backed vehicles they didn't understand. I have as little sympathy for homeowners who were lured by low "teaser" mortgage rates as I do for people who buy a houseful of furniture and "make no payments for a year," then have their sofa set repossessed. I do feel for investors who trusted the advisers at their financial institutions, salespeople who said and perhaps even believed that ABCP was as solid an investment as a high-yield bond.[32] Financial services firms will have less to fear than investors because recent events and the perspective reflected in the blueprint suggest that the government will come to the aid of the industry by tapping into another exploitable resource ' taxpayers.[39] What if the blueprint's model, which treats investors as an exploitable resource, is adopted and proves inadequate to the task of protecting investors' interests? The financial services industry will suffer right along with investors.[39] The financial services industry exists to serve investors, not the other way around.[39]
Regulators' concern for the fate of the resource is only relevant in the context of being a necessary factor of production for the industry. The problem with this regulatory paradigm for financial services is that people aren't analogous to fish.[39]
Released late last month the Treasury's "Blueprint for a Modernized Financial Regulatory Structure" calls for sweeping changes to the nation's banking and securities regulatory structure.[43] Now that I've had two weeks to think about it, I like Treasury Secretary Henry Paulson's blueprint for overhauling the regulation of our financial institutions. I don't think it's perfect, but many of its aspects get a thumbs-up from me.[19] The treasury secretary reiterated the U.S. commitment to free trade and getting a new World Trade Organization liberalization deal but noted also that "a significant contribution by the advanced developing countries is critical to (its) success."[8]
Sovereign wealth funds, investment funds owned by national governments, have become increasingly active in buying U.S. assets with expanding foreign exchange reserves from oil sales and trade. [34] With $1428bn assets under management (2007), AllianzGI ranks amongst the top investment management companies worldwide. Through its network of more than 4300 employees around the globe, including more than 900 investment professionals, AllianzGI is able to leverage local expertise and market knowledge to its clients all over the world.[7] "FT", "Financial Times", "Money Management", "Investment Adviser", "FTAdviser", "Mortgage Adviser" and "Financial Adviser" are trademarks of The Financial Times Limited and their associated companies. No part of this publication may be reproduced or used in any form without prior permission in writing from the editor.[17] Sectors that should have fallen more, like cyclicals and smaller companies, did reasonably well in comparison. Commenting on this anomaly, Ad Van Tiggelen, head of European equities at ING Investments in the Netherlands, said: "De- leveraging in the financial system took place in large, liquid stocks. This protected smaller, less liquid investments." Van Tiggelen said he believed that cyclicals and small caps had further to fall, but he remained positive on utilities and, to a lesser extent, telecom companies.[21]
Principal fund holdings include Yara and Syngenta. Baardsen can invest 10 percent of the portfolio outside of Europe, a fact that helped his returns in the three-month period. He favors agriculture stocks in Latin America. Potential investments include Cresud, an Argentine company whose main businesses include grain production, bean and milk production and forestry, and New Zealand Farming Systems, which is converting 26,000 hectares, or 100 square miles, in Uruguay into intensive dairy farms like those in New Zealand.[21] Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms.[29]
By the time it became widely known that BNP Paribas had suspended redemptions on three funds exposed to asset-backed securities, the market linked the development to sharp falls in U.S. equity markets and it was front page news around the world.[20] Concerns about the credit markets and weak U.S. data supported global bond markets in the first quarter, though riskier high-yield funds underperformed in the period.[21] Skyrocketing prices of rice, wheat, corn, cooking oil, milk and other foodstuffs come against a backdrop of a spreading global financial crisis, a U.S. economy teetering on recession and currency market imbalances.[26] "Downside risks will vary. but no economy is entirely immune from global forces."[8]
The push for more details on assets at risk of loss echoes the Group of Seven's call last week as policy makers seek to tighten supervision of capital markets.[1] The experience and performance of the asset management divisions of OTP Group in the region support and underline the group"s position, regionally, as well as locally.[40] The advantages of OTP Asset Management products are reflected in the reduced costs of transactions, due to a high volume of assets under administration and also in the liquidity of the amounts invested.[40]
Real estate services accounted for '7bn at the end of the year while insurance-related assets under management amounted to '110bn.[20] BNP Paribas Securities Services, the custody and clearing unit, had almost '4 trillion of assets under custody at the end of the year and accounted for 4,800 employees in 30 countries.[20]
BNP Paribas Banque Priv'e, the private bank, had '152bn in client assets at the end of 2007, with each client in France typically having personal wealth of at least '250,000. It is rolling out its operation through a partnership with the bank's Italian subsidiary, BNL, in a model that Sophie Lugiez, head of partnerships at BNP Banque Priv'e, hopes to replicate in Asia and elsewhere.[20]
Last month, it entered a strategic partnership with the funds arm of Saudi Investment Bank.[20] The bank is spearheading the Bush administration's clean technology fund to help developing countries combat climate change.[25]
Chu says his committee wants to increase its foreign exposure and bring the total allocation to 46.8%. Overseas allocation for the teacher'''s fund has been revised to 27% from 17% last year, he says. '''We plan to outsource an additional $1 billion this year,''' Chu says.[44] Despite the fact that the Savile Row-based fund manager was "adversely impacted" by the foreign exchange rates, according to the notes, the group still managed to increase post-tax profits by 12.5 per cent to £17.8m in the year to the end of April 2007.[18] The fund recently bought Autogrill, the Italian motorway and airport service group. Its shares have been hit hard, but its business is considered likely to prove resilient.[21]
The average bond fund gained a robust 4 percent, with government paper significantly outperforming corporate credits. Asia funds, especially those focused on China and India, bore the brunt of the losses, slipping more than 40 percent in some cases.[21] A bank failure has wider consequences for the economy than, say, a retailer going under. That's why you frequently hear the phrase "too big to fail" in regard to these companies. It's less of an economic pain for the government to bail out a bank than let it fail and deal with the consequences.[19] Robert J. Schiller, Susan Byrne and investment adviser Charles Ellis discuss the impact of the housing situation on the market and the U.S. economy.[39]
Many people write asking advice about various investments advertised in newspapers, on radio, or touted by cab drivers and brothers-in-law. Many of these investment tips come with enough red flags that the usual caveat "if it seems too good to be true, it probably is," sounds enough of a warning bell. If one sensed a twinge of greed behind their investment motives, perhaps if they seemed willing to risk having their children go without shoes while Mom and Dad tried to win the lottery, they would receive little sympathy. The optics in this case is that good people placed trust in a product unfit for public consumption, not unlike tainted blood transfusions or poisoned pet food or toys with lead.[32] Valuation, followed by risk management and disclosure, was cited by survey respondents as the most important issue to be addressed by the standards.[4] BitDefender has introduced a new line of security solutions for small- and medium-sized enterprises that set new standards for proactive management of electronic threats.[40] Mr Smith called for a new rating structure that accurately reflected the different quality of scrutiny applied to a single security compared to a corporation. "To have a AAA security suggests it's the same as a AAA company, to an investor," he said. It is not the same, he said. "A company's history, its management, the quality of its earnings and receivables, are all assessed. It's a huge thing.[33] Pease pointed to the recent good earnings results season as an indication that European companies outside the financial sector were doing reasonably well. He said he believed the sense of foreboding was distracting investors from some of the excellent value in the market.[21]
'''We also welcome the principles and practices set out by the Investors''' Committee since the commitment of investors is so important to enforcing best practice.[3] With institutional investors showing no signs of giving up on the asset class, other managers are looking to prosper by seizing on the opportunities for profit offered by distressed assets.[4] Half the increase was because of net inflows, including a net inflow of almost '2bn in the last three months of the year when investor sentiment was turning bearish. Its revenues grew 21% last year, to more than '5bn, accounting for almost a fifth of the bank's total revenue.[20]
The statement stopped short, however, of saying G7 members would intervene in global markets to prop up the dollar. The World Bank is also holding its spring meeting this weekend.[23]
The severity of the pullback was attributed to frothy valuations and slowing economic growth expectations, as well as general disarray in financial markets. [21] Treasury is "taking further steps to support the process of normalizing our financial markets today.''[1]
Paulson stressed that state and local regulators need to strengthen oversight of mortgage originators, while credit rating agencies must "perform robust due diligence" of originators of assets that are securitized or used as collateral for structured products. [31] Paulson also cautioned developing countries against the use of price controls and consumption subsidies to consumers that are generally not effective and efficient methods of protecting vulnerable groups.[28] Stocks that are benefiting from some of the market's concerns include K+S, the fertilizer group, which has risen strongly on higher food prices, and Fortum, the Finnish power group, which has climbed on higher energy prices, Pease said.[21] News Cosatu turns up heat on food protest Cosatu, the powerful labour federation, warned yesterday that South Africa could become the latest country to experience food riots, as it launched a protest campaign against soaring food prices.[41]
"Given the significant short-term downside risks, we are taking action," Paulson said. [38]
SOURCES
1. Bloomberg.com: U.S.
2. Treasury wants better hedge fund asset disclosure | Reuters
3. Hedge Fund Standards Board Welcomes Proposals From President'''s Working Group
4. Hedge Fund News HedgeWeek HedgeMedia
5. Canadian Economic Press - Welcome
6. President's group on finance sets guidelines for hedge funds, investors UPDATE - Forbes.com
7. Arab Bank signs agreement with Allianz Global Investors to develop investment funds | Arab Bank Plc
8. AFP: Global economy faces 'considerable challenges': Paulson
9. Paulson urges diligent IMF forex surveillance - International Herald Tribune
10. The Associated Press: Best practices urged for operations of giant hedge funds
11. FT.com | US hedge funds, investors, eye voluntary standards
12. Bobsguide - Treasury makes hedge fund recommendations
13. Director of Finance Online - Hedge fund standards drive investment
14. Investors prefer hedge funds with standards - Financial Director
15. Global Pensions
16. Financial News and Information from Financial News Online US
17. FTAdviser.com - Laven calls for standard hedge fund valuations
18. Boss of Silchester hedge fund rakes it in - Telegraph
19. Why Paulson's Plan Works
20. Financial News and Information from Financial News Online US
21. It's Not All Bad News on the Investment Front Portfolio Managers Make the Most of the Sell-Off By Focusing on Strong Companies - Business - redOrbit
22. News::Administration Deals With U.S. Economy
23. Paulson Foresees Tough Year | Currencies - TheStreet.com
24. IMF must change to stay relevant, says US Treasury boss - World, Business - Independent.ie
25. US Tsy Paulson: Countries Should Avoid Food Price Controls
26. AFP: Higher commodity prices help developing countries: Paulson
27. EMB Treasury's Paulson urges developing countries to reject food price controls - Forbes.com
28. Paulson: Higher Commodity Prices Help Developing Countries | April 15, 2008 | AHN
29. Paulson says food price controls won't work | Politics | Reuters
30. Bloomberg.com: Worldwide
31. WebCPA - Policymakers propose broad revamp of credit markets
32. Protection? Investor beware
33. Overhaul ratings system: ANZ | The Australian
34. UPDATE 2-US is vigilant on sovereign wealth funds-Treasury | Markets | Bonds News | Reuters
35. Free Preview - WSJ.com
36. Free Preview - WSJ.com
37. A conservative New Deal
38. More bumps in the road possible for markets: Paulson - MarketWatch
39. Paulson's plan forgot the investors - InvestmentNews
40. OTP Group Enters Romanian Investment Market | English section | Ziarul BURSA
41. Business Report - UK private equity firms face talent shake-up
42. LocalNews8.com Idaho Falls, Pocatello - Weather, News, Sports - New guidelines proposed for hedge funds
43. Treasury Report Calls for Hedge Fund Registration
44. Taiwan'''s public pension fund to invest more offshore - Institutions & Pensions - www.AsianInvestor.net - The network for Asian investment management in Asia Pacific
45. Free Preview - WSJ.com
46. London Stock Exchange - Article
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