I suspect that the concern regulators had – even before the crisis – was whether the risk models of banks were accurate when it came to the fat tail events – in other words did they accurately model how bad things could get? Here the failure was in cumulative impact analysis, in particular around accurately assessing the impact of failing liquidity.
It’s also worth pointing out that the selling was to do with the fact that people had set their stop-losses at the same level – say a drop in the markets of 4% over a week – rather than simultaneous selling of the automated program trading funds per se. Hedge funds were actually net buyers as the markets fell but the selling pressure was created by banks calling in their leverage and investors making redemption demands.
Now, the reason this became a problem in the cash equity markets was that these markets need a certain level of risk capital to lubricate them. Usually this is supplied by the banks but it dried up. By contrast, the futures markets, in which funds like AHL
Assets are now flowing back into hedge funds because, broadly, the hedge fund community did a good job of risk management during and after the crisis. Notwithstanding the fact that there was correlation across strategies where you wouldn’t have expected it, risk-adjusted returns and draw-downs across the sector were good (I’d separate out the hedge funds of funds here that had a worse experience and where most of the gatings
I think also the strength and robustness of the businesses at many hedge fund firms have helped to restore trust and give a sense to investors that the sector is strong and sustainable.
Finally, the sector has benefited from the shift of investors’ principal concern towards liquidity. Rather than investors saying, as they once did ‘we want a certain percentage in private equity, in hedge funds and in property’, now they are saying ‘we want specified proportions available daily, available weekly and available annually – and an amount we don’t need for 30 years.
Hedge fund strategies sit well across that liquidity spectrum; managers have managed to shape their funds around these changing portfolio requirements quite effectively.
When AIFMD emerged from the European Commission in draft form, it provided a challenge for the alternatives industry that it hadn’t faced before. Both the hedge fund and the private equity community is a collection of disparate and fragmented managers of private capital which, up to then, had actively avoided publicity. Suddenly to come together to voice their concerns about the draft directive was difficult.
Here the Hedge Fund Standards Board
But the real breakthrough was when investors joined the lobbying effort to amend the directive
You’re seeing the consolidation trend that’s at work in the wider asset management sector at work to a lesser extent in hedge funds. To an extent our acquisition of GLG
But if you mix quantitative