Hedge funds need tighter rules on risk

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The Independent Online

Many hedge funds are so poorly run, have such volatile performance and high exposure to risk, that investors need greater protection from regulators, a study published today by the European School of Management & Technology concludes.

The report contradicts claims by the hedge fund industry that the sector does not need the sort of tighter controls proposed by the European Union's new Directive on Alternative Investment Fund Managers.

The regulation, passed by the European Commission last month, is deeply unpopular with the hedge fund sector and has been opposed by the British Government. However, the ESMT report, which looked at the performance of more than 1,500 funds over the past 10 years, concludes that many hedge funds "actively chase performance at all costs, irrespective of the potential level of risk to which they are exposed".

Guillermo Baquero, the ESMT assistant professor who authored the research, said analysis of hedge fund industry's performance suggests that despite claims that much of the sector is less risky than that of the banks, greater scrutiny is needed.

"We should not be scared to tighten the regulatory screw on the hedge fund industry and force considerably greater disclosure," he said. "Now is the time to discuss deep, substantial and effective regulation that will genuinely be of use to investors and protect our financial system for the future."

Mr Baquero said the crackdown via the EU directive on alternative investment funds should be welcomed.