February 8, 2000 Five Hedge Funds' Report on Industry
Stops Short of Call for New Regulation
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Five Hedge Funds' Report on Industry
Stops Short of Call for New Regulation
By MITCHELL PACELLE
Staff Reporter of THE WALL STREET JOURNAL
Five of the nation's largest hedge funds joined the debate about government scrutiny of the industry with a report that stops short of endorsing any regulatory oversight.
The report from the five hedge-fund companies -- Soros Fund Management, Tudor Investment Corp., Moore Capital Management Inc., Caxton Corp. and Kingdon Capital Management -- is the first formal response from hedge funds to calls for industry reform following the near-collapse in 1998 of Long-Term Capital Management LP, which roiled global financial markets.
The group's recommendations, which are expected to be released formally Tuesday, follow a string of reports from governmental and private groups and the proposal of federal legislation calling for increased hedge-fund oversight, including regular public disclosure by fund managers. It remains unclear if federal regulators will mandate any changes in the industry.
Hedge funds are private investment partnerships open to institutional investors and wealthy individuals.
The hedge funds' report, "Sound Practices for Hedge Fund Managers," says that funds should establish risk-monitoring systems that are independent from portfolio managers. Managers should perform periodic "stress tests" to determine how changes in market conditions would affect their portfolios, it says. And managers should develop and monitor several measures of risk, the report says, and make "periodic" reports to lenders and counterparties.
The report endorses no drastic change, but suggests that hedge-fund managers "should coordinate with counterparties and regulators to develop a broad consensus approach to public disclosure." It suggests no mandatory limits for borrowing or approaches to managing risk. Moreover, the recommendations might not be practical for smaller funds, the report says.
"The recommendations were developed in the belief that the most effective form of oversight is self-evaluation combined with self-discipline," the report says.
The suggestions seek to "promote sound risk management and internal controls" for large hedge funds, to "reduce the possibility of their failure due to unexpected market events," and to "reduce the likelihood of systemic consequences resulting from a hedge fund's default or failure," the report says.
Kenneth Raisler, of Sullivan & Cromwell, a lawyer commissioned by the group to prepare the report, described the recommendations as the "the high end of what a risk management program should be." None of the five funds that sponsored the report, each of which manages more than $3 billion, has pledged to adopt the recommendations, he said. "Some of the practices have been adopted by some of the group," he said. "But not all of them are being used by all of the group."
Concludes the report: "While thorough and thoughtful risk measurement and analysis are critical elements of sound hedge-fund management, they will not spare the hedge-fund manager who refuses to take the steps necessary to preserve appropriate levels of liquidity when faced with stressed market conditions or unexpected losses."
Write to Mitchell Pacelle at mitchell.pacelle@wsj.com
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