LONDON, 27TH October 2005 — The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, today issued its response to Discussion Paper DP05/4, “Hedge funds: A discussion of risk and regulatory engagement”, issued by the UK Financial Services Authority (FSA) on 23rd June 2005.

AIMA’s response has been prepared by the largest working group of members that AIMA has ever assembled to work on any regulatory consultation; all sectors of the alternative investment management industry in the UK and Ireland have been represented in the group.

AIMA welcomes the FSA’s several acknowledgements of the benefits that hedge funds bring to financial markets and has also noted comments made by the FSA’s executive in recent weeks, referring to appreciation of hedge funds’ increasing importance and contribution to dynamic marketplaces and to the UK as the centre of hedge fund management in Europe. AIMA, however, does not share the FSA’s perception of undue risk likely to be caused to markets by hedge funds, singly or in multiples; in AIMA’s view, no evidence has been offered to suggest that hedge fund managers are likely to cause any more disruption to the market than other players.

Throughout the first 10 months of 2005, and contrary to media rumors, there has been no serious market disruption. As in most years, a number of hedge funds may have suffered reversals in market performance and there has been a steady attrition of unsuccessful funds. However, in a free market, this is not a sign of ill-health in the market as a whole.

AIMA also points out that there is no apparent evidence of a higher level of fraud within the industry than elsewhere; further and most significantly, the UK has, to date, had a clear record in this regard. AIMA rejects the suggestion that standards of systems and controls, compliance and risk management are somehow lower among hedge fund managers than other, more highly regulated firms: many specialist firms regard themselves as having ‘leap-frogged’ more traditional providers into next-generation systems and investment techniques, partly because of superior profitability and partly because of the lack of ‘legacy’ systems/issues.

AIMA has welcomed the establishment of the FSA’s ‘centre of hedge fund expertise’, assuming that it will be (and remain) properly and adequately resourced, and suggests that it be allowed to ‘bed down’ before any other action is considered. AIMA suggests, however, that size of firm in and of itself is not a criterion for enhanced supervision: both small and large managers may run strategies which might make them ‘high impact’.

AIMA does not agree that new ‘permissions’ for hedge fund management and/or prime brokerage are necessary or desirable; if there are to be changes, AIMA would prefer that industry participants be required to notify the FSA when commencing such activities.

As to valuation issues, AIMA does not believe that regulatory action alone is the best way forward; industry-led, together with internationally-coordinated, initiatives (including AIMA’s own work on asset pricing and fund valuation) towards greater standardisation should assist. Again, the issues raised in respect of valuations are not unique to the hedge fund industry. It is the norm, however, to use third party administration in the European and Asian hedge fund industry.

AIMA broadly accepts that some form of ‘code of conduct’ might be a positive step but suggests that this should evolve from an industry initiative. It suggests that AIMA’s Sound Practices Guides might be expanded and updated with the involvement and endorsement of the FSA. The industry is likely to accept principles-based practices.
AIMA now has over 270 corporate members in the UK. We welcome the FSA’s acknowledgement that any increase in regulation should not weaken the UK’s competitive advantage. Any additional regulation must be proportionate, as the FSA itself has emphasised in issuing this paper.

AIMA’s full response may be seen here. AIMA will await the FSA’s consideration of all responses to DP05/4 before making any further comment.

AIMA is also responding now to the separate FSA’s paper, DP05/3, “Wider-range Retail Investment Products” and a separate Release will be issued on that.

About AIMA

Founded in 1990, AIMA is a not-for-profit global trade association with corporate membership in 46 countries, including over 270 in the UK. AIMA focuses specifically on hedge funds, managed futures and managed currency funds. More than 920 corporate members (comprising 3000 individuals) enable the Association to create global tools for the benefit of its members, institutional investors and regulators. Its objectives are to increase investor education, transparency and promote due diligence and related sound practices, and to work closely with regulators and interested parties in order to promote the responsible use of alternative investments. AIMA’s membership includes fund of funds managers, institutional investors, hedge fund managers, prime brokers, exchanges, fund administrators, auditors, lawyers and other specialist service providers. Please visit us at www.AIMA.org.

For further information, please contact Emma Mugridge, AIMA, emugridge@aima.org or tel +44 (0)20 7659 9920.