WASHINGTON, D.C., November 3, 2005 — Managed Funds Association (MFA) submitted a comment letter to the U.K. Financial Services Authority (FSA) in response to its request for comments on Discussion Paper 05/4: “Hedge Funds: A discussion of risk and regulatory engagement.”  This is the third submission in recent years by MFA to the FSA on issues impacting the hedge fund industry in the UK.  

MFA, headquartered in Washington, DC, is a trade association representing professionals who specialize in alternative investment strategies, including representatives from the majority of the world’s largest hedge funds.  Given the global nature of MFA’s constituency, in terms of both geographic location and trading activity, MFA believes it is well placed to comment on issues raised by FSA in the Discussion Paper.

MFA commended the FSA for producing the Discussion Paper and organized its comments to focus on seven issues raised by FSA and of importance to MFA’s constituency and the industry as a whole.   These are as follows:

• Whether there is need for a hedge fund code of conduct;
• Whether there is a need to distinguish hedge fund managers and how does one draw the distinction;
• Liquidity mismatch concerns with respect to the stability of the marketplace;
• Valuation issues;
• Hedge fund governance and reputational issues;
• Confirmation backlogs with derivatives transactions;
• FSA’s “data collection” concept.

The Association elected to focus on these seven areas given its significant experience in addressing these issues with its hedge fund member base.  MFA believes it can make a valuable contribution to the FSA’s thinking in these subjects.

MFA President John G. Gaine, said, “MFA’s comments to the FSA discussion paper are vital to the preservation of a regulatory framework that continues to inspire innovation among our members and our industry for the benefit of investors on a global basis.  I am pleased with the content of this commentary and confident that our work will benefit all interested parties.”

As an overriding principle, MFA states that it obviously believes hedge fund managers should comply with all applicable rules and regulations.  MFA and its members have welcomed rules to protect the integrity of the markets and, as responsible market participants, hedge fund managers are committed to ensuring that their business practices meet the highest standards. MFA believes that the current level and method of FSA regulation is appropriate.  More importantly, MFA stresses that it is vital that the industry in the UK be encouraged to stay within FSA’s regulatory framework rather than move offshore or seek regulatory arbitrage.  

Moreover, the Association notes the “regulatory compact” that essentially distinguishes retail funds (such as mutual funds) from non-retail funds (such as hedge funds).  Retail funds must limit their investment strategies in exchange for wide latitude in marketing to the investing public; hedge funds must limit their marketing to only certain sophisticated investors in exchange for wide latitude in pursuing different investment strategies.  This compact, according to MFA, should underscore any review of the industry by policymakers.

Accordingly, MFA’s comments generally encourage industry-led initiatives as most appropriate to deal with particular issues in the hedge fund industry.  Specifically, the Association points to MFA’s 2005 Sound Practices for Hedge Fund Managers (Sound Practices), which is designed to help managers create their own management and internal trading controls, responsibilities to investors, valuation policies and procedures, risk monitoring, regulatory controls, transactional practices, and business continuity and disaster recovery programs. MFA’s Sound Practices recommendations are an example of a “code of conduct” that has been drafted by, and for, the industry from a “peer to peer” perspective, and establishes comprehensive standards of excellence for single-manager hedge fund operations.  

One of the central themes in MFA’s Sound Practices is that “one size does not fit all” given the fact that the strategies, investment approaches and amount of assets managed by individual fund managers vary greatly. Accordingly, in its letter, MFA stresses the difficulty that would exist for the FSA in setting forth rules that would prescribe for the industry a formulaic “hedge fund” definition, controls to address “liquidity mismatches”, or valuation procedures.  MFA points to specific aspects of its Sound Practices recommendations in each of these areas to makes its point.  

MFA also speaks to concerns raised by FSA with respect to confirmation backlogs with credit derivatives. MFA comments that that it is working closely with ISDA on the Novation Protocol and committed to monitoring the implementation of the Protocol.  Finally, with respect to calls for increased data collection, MFA states that it would be difficult to implement given the jurisdictional limits and practical limits on FSA.  MFA recommends that FSA engage in a dialogue with members of the President’s Working Group, the SEC Office of Risk Assessment and other international regulators that have a significant presence of hedge fund within their borders.

Mr. Gaine says the Association plans to continue its ongoing dialogue with FSA to discuss hedge fund industry regulatory issues.  For a copy of MFA’s Comments to UK’s FSA, please visit MFA’s website at: www.mfainfo.org.  

MFA, headquartered in Washington, DC, is the primary trade association representing professionals who specialize in alternative investment strategies including hedge funds, funds of funds and managed futures funds. MFA’s over 1,000 members include managers affiliated with the majority of the 50 largest hedge funds, which manage a significant portion of the estimated $1.3 trillion invested in hedge funds. Since its inception in 1991, MFA has provided industry leadership in government relations, communications, media relations, and education to MFA members and investors.

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For further information call:     

Stephanie Miranda Pries
Vice President & Senior Legal Counsel
Managed Funds Association
(202) 367-1140
Stephanie@mfainfo.org