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Hedge funds marshal case against regulation

Industry fears excessive rules could damage its flexibility and strength

Hedge funds sought to deflect the threat of tougher regulation yesterday as European politicians and regulators started sabre-rattling and pledging that more rules are on the way.

“It is important to stress that hedge fund managers in Europe are currently rigorously regulated at both national and European levels,” Andrew Baker, the chief executive of the Alternative Investment Management Association (AIMA), said. “The industry is also subject to a whole range of European directives. It is part of the solution, not part of the problem.”

Hedge funds, already hurt as falling markets, dwindling lending and re-demptions from their investors erode their profitability and drive many to close, have been fighting politicians to try to stave off regulation. Last month, some of the industry’s top luminaries, including TCI’s Chris Hohn and Paul Marshall, the co-founder of Marshall Wace, faced a grilling from British MPs over their role in the financial crisis.

The funds have historically made their money by looking around for niches to invest in, such as derivatives, where other financial institutions do not trade, and the fear is that excessive regulation could curb the industry’s strength, built on such flexibility.

The AIMA statement came as reg-ulators and central bankers across the developed world push for a global regulatory framework in the wake of the financial meltdown that has shaken the planet in the last year and a half. Hedge funds, credit rating agencies and all other important market players should be subject to this global approach, the European Central Bank’s president, Jean-Claude Trichet, said at a conference yesterday.

“The current crisis is a loud and clear call for extending regulation and oversight to all systemically important institutions – notably hedge funds and credit rating agencies – as well as all systemically important markets – in particular, the OTC [over the counter] derivatives market,” M. Trichet said. “What is currently under discussion is the precise way in which these elements should be integrated within an overall regulatory framework,” he said.

The UK’s Financial Service Authority has said it wants a global framework. Global regulatory reform tops the agenda for a summit of the Group of 20 rich and big emerging economies in London in April.

Antonio Borges, the chairman of the Hedge Funds Standards Board, a voluntary UK body, said hedge funds had behaved responsibly, proven their value with lower losses than elsewhere in the market and had a better understanding of risk than almost anybody. “We have to conclude the hedge fund model will remain quite powerful. It has very low leveraging,” Mr Borges said.