The forgettably named ‘International Organisation of Securities Commissions‘ or IOSCO has just released details of a new Template for gathering data on Hedge Funds from around the world with an aim to spotting concentration of risk for financial markets. The data they hope to collect will provide incredible potential for ensuring compliance with whatever the various authorities around the world wish to monitor or control. They want to collect amongst other things: Information on all the key people in the firm, all their advisors, their assets, the turnover of traded assets, the gross subscriptions and redemptions, the positions in all their portfolios by sector, by securities or derivatives, their gross long and short positions and their borrowing levels as well as key contractual aspects to their borrowing.
They also want to know about counterparties and their identities and location and whether assets can be rehypothecated and to what extent. Finally they also want to know how each fund measures its market risk and sensitivity to interest rates, credit spreads and equity markets as well as what stress tests are made. (On this part StatPro can help – see solutions for hedge funds)
Hedge funds were founded on the basis of “Trust me, I know what I am doing”. Secrecy was considered important because if a clever manager let on about his trading strategy his competitors could ride on his coat tails and pinch his profits. Consider Mr Paulson; he basically made one investment call and then took a series of positions that reflected that view. He thought the housing market was going to fall so he shorted CDOs, bought cheap CDS and sold bank shares everywhere as much as he could and he held his position for 18 months. He then made $20 billion for his investors. Would the new levels of transparency make such a trade impossible in the future? Because once the information starts to be collected, it is either going to be published or, even if it’s supposed to be held secret, it is bound to leak out somehow.
Perhaps this just takes the battle of the hedge funds to a new level.
Many hedge funds already rely on meticulously researched information before deciding how to play a particular angle, now part of the game will be to disguise their intentions whilst being transparent and at the same time studying the moves of their competition in more detail. You can imagine a scenario where a particular hedge fund has some clear position and then suffers redemptions and this information is known.
Other hedge funds will see the fund’s positional weakness and pile in against it. With reduced resources due to redemptions, the fund will have to close the position at a loss and no doubt suffer further redemptions as a consequence. Such is the stuff of nightmares for hedge fund managers, but it seems that they are about to find out how to live in a glasshouse, so maybe they will stop throwing so many bricks at each other?