Regulatory Reform Aligning with Investors’ Self-Interest
Increased regulation of the alternative investment industry has been a much-discussed subject in the months since the bursting of the financial bubble. The loss of wealth has led many investors to increasingly demand transparency. At the same time, regulatory bodies have been swiftly moving to overhaul the alternatives sector in an effort to hold fund managers more accountable.
One of the most controversial pieces of potential legislation is the draft of President Obama’s Financial Regulation Proposal. This plan would have every hedge fund, private equity fund, and venture capital fund register under the Investment Advisers Act. This would require funds to report information to the government so that it could assess systemic risks associated with funds’ activities.
In the European Union and elsewhere, similar proposals are popping up. The Alternative Investment Fund Directive could completely change the EU’s current regulatory system. Key points of contention lie in the directive’s ability to place limits on funds’ debt levels and require funds to hold capital to cover potential losses and redemptions. This proposed legislation takes President Obama’s requirements one step further in establishing strict rules for alternative investment products.
These proposed changes to the regulatory framework are largely in line with investors’ current demands of transparency. One large fund of hedge funds has recently tightened its reporting requirements for all underlying hedge funds. The group is seeking monthly reports on the funds’ positions. Another wealth advisory firm recently told Brighton House it is seeking funds that will give it access to all reasonable facets of funds’ strategies. While some investors may still understand the necessity of maintaining walls around these opaque products, many investors’ requirements are aligned with the current government proposals.