Compliance - Hedge Funds and
Alternative Investments
It is
not easy to regulate Hedge Funds directly.
They use an indirect approach.
They establish
laws, regulations, directives and best practices
for the hedge funds’ counterparties and creditors, for banks and
securities firms. Although indirect supervision can be very
effective, it can also become a competitive disadvantage for a country
or a region.
They speak
about the need of a robust internal risk
management systems for the hedge funds’
counterparties. Working with a "Highly Leveraged Institutions (HLI)"is
a risk. You need to stress test your exposure, to measure it,
and to allocate more capital for this risk.
They establish
Accords like the Basel ii, which informs regulators and
supervisors that they have to focus on the risks
that come from Highly Leveraged Institutions
like the liquidity risk, the
concentration risk, the (fat) tail risk. They should
ensure that the banks’ internal systems capture
the full range of exposures to hedge funds. If not, banks can
forget the "advanced" Basel ii approaches.
They speak
about market transparency, which is never
adequate, ignoring that this is primary risk for hedge funds: There are many that
are more than willing to copy the strategy, behavior, model etc. of
VIP hedge fund managers.
They speak about efficient oversight by
banking and securities supervisors. They have new weapons,
like Basel ii, MiFID, UCITS iii.
They always
speak about the "lessons learned" from
the hedge fund Long-Term Capital Management (LTCM). Nobody is able to
learn something from
the top 50 performing hedge funds.
Regulatory Arbitrage
Regulatory Arbitrage is the practice of taking advantage of a
regulatory difference between two or more markets. Our key goal is
to generate alpha, excess return over market performance. Alpha has
always to do with the skills of the hedge fund manager. Skill-based
investing makes the real difference. For more you may visit
www.regulatory-arbitrage.com
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