Hedge funds - the bad boys of finance. Or is that private equity? We lose track of who is finance’s enemy number one from one month to the next. But not so long ago the funds were deeply unpopular - accused of stalking the markets, creating volatility, aggressively targeting respected UK companies through short-selling and looking for decent, hard-working public company executives to unseat.
Then private equity got a touch carried away in the FTSE 100 and the buyout groups found themselves being picked over by the unions, parliament and the media. Now the credit markets have closed for business and it’s Northern Rock, the Bank of England, the FSA and the government in the dock for financial mismanagement and endangering the system.
So should hedge funds, and private equity, skulk away thankfully as the fickle public spotlight has found itself another target?
No, argues Paul Marshall, chairman of Marshall Wace and a member of the UK’s hedge fund working group, in an FT comment article. Hedge funds may not be at the centre of the current storm he says, but there is a web of linkages between the banks and hedge funds. “Plus the the similarity of issues facing banks and hedge funds, particularly in relation to valuation and risk management, demonstrates how integral hedge funds have become to the workings of the financial system.”
There are numerous legitimate reasons for public and government interest in hedge funds, says Marshall, ranging from financial stability to investor protection, and pay.
There will be those who argue that public engagement of any kind goes against the grain of the maverick entrepreneurialism that is at the heart of the industry’s success. But such a position is becoming increasingly untenable.
But, argues Marshall, large investors must also play a role in setting standards and holding managers to account - just as in the long-only world.
Marshall adds that calls for more regulation, in France, Germany and the US should provide an adequate stick for hedge funds to further the process started by the working group under Sir Andrew Large. “The hedge fund industry must be seen to be taking its responsibilities seriously. If not, others will fill the vacuum.”
Private equity, anecdotally, is also continuing efforts to improve its public image. The heat may be off for the time being, one leading practioner told FT Alphaville, but after being splayed out on the grill for a public inquisition, the industry is taking steps behind the scenes to ensure it is at least better prepared should it find itself there again. Look out for some glossy, annual report-style documents from the buyout boys in your mailbag in future.
