IOSCO seeks better hedge fund risk management

The International Organisation of Securities Commissions has released the report on the Second Hedge Fund Survey, aimed at facilitating the effective management of risks associated with hedge funds.

 According to IOSCO, the survey is meant to collate data from hedge fund managers and advisers regarding the markets in which they operate, their trading activities, funding and counterpart information.

It added that the survey formed part of IOSCO’s efforts to support the G20 initiative of mitigating the risks associated with hedge fund trading and traditional opacity.

Consequently, the report, published on the organisation’s website, highlighted the efforts made by regulators globally to better understand the hedge fund industry and its salient features.

The organisation added that although it had some limitations, the survey was a useful tool for examining the hedge fund segment of the

market, “particularly considering the limited amount of publicly available hedge fund data.”

The Secretary General, IOSCO, David Wright, was quoted as saying, “This work is an essential building block to develop a more transparent and open global financial system. It is essential that regulators have the full picture of all parts of the market from which to make appropriate policy judgments.”

He explained that because hedge funds tend to operate across multiple jurisdictions, the survey offered a unique perspective on the

global nature of these funds.

Apart from highlighting how hedge fund-related risks can be mitigated, the IOSCO survey also offers an insight into the state of the global hedge fund industry (as of September 2012).

Areas covered by the report include; qualifying funds, assets under management, fund domiciliation and investment strategy.

It also shows how financial leverage is used by firms to increase their market exposure.

According to IOSCO, the report was based on data collated from 1,044 qualifying funds, representing $1.94tn in total net assets under management with the United States and the United Kingdom being the predominant regions where hedge fund managers/advisers are located.

It said, “These funds are usually domiciled in offshore jurisdictions in order to benefit from more favourable tax and regulatory regimes. The Cayman Islands have been the predominant domicile for these funds.

“The report indicates that the single most represented strategy among active funds is equity oriented. Macro-oriented and multi-strategy funds are also significant.”

 While acknowledging the survey’s limitations, which it said prevented definitive conclusions from being reached on the risk to the financial system, IOSCO stressed that the data contained in the report “is at the core of the systemic risk analysis that regulators aim to better understand and capture.”

It added that it would continue to promote the collection of comparable hedge fund data among regulators with the aim of fostering an internationally consistent approach to measuring risks and improving data quality and reliability.

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