Report On The Third IOSCO Hedge Funds Survey
In November 2008 IOSCO established the Task Force on Unregulated Financial Entities (“Task Force”), which was meant to support G-20 initiatives to reduce risks associated with unregulated entities and develop an appropriate regulatory approach where needed.
The Task Force initially focused on hedge funds, reflecting the G-20’s particular concerns at the time, which resulted in a report on Hedge Funds Oversight in June 2009. This report made six recommendations (“principles”) for the regulation of hedge funds and/or hedge fund managers1 to ensure global consistency in the approach to the regulation of hedge funds and/or hedge fund managers. Principle 4 in particular, recommended that hedge fund managers/advisers are required to provide regular information to their relevant regulator for systemic risk purposes. The Task Force subsequently developed the IOSCO Hedge Fund Survey to help achieve a globally consistent collection and sharing of such data on hedge fund activities and their risks. The IOSCO Hedge Fund Survey (“Survey”) remains the only such exercise on a global level.
The first iteration of the Survey collected data as of 30th September 2010. At the time, a number of IOSCO members faced legal constraints relating to sharing data. Consequently, strong conclusions could not be drawn on the systemic importance of the global hedge fund industry and its risks. The second IOSCO Survey, collecting data as of 30th September 2012, managed to overcome some of these constraints. Participation in the exercise increased and included a contribution from the US, where the majority of hedge funds are managed. Data also became more comparable and therefore more meaningful due to better explanations and guidance in relation to the definitions used in the questionnaire. Since then the IOSCO Survey has become an integral part of the work of the IOSCO Committee on Investment Management (Committee 5), the aim being to conduct the Survey as a regular exercise.
The third and present iteration of the IOSCO survey collected data as of 30th September 2014. The Survey benefited from the participation of the following nine authorities: ASIC (Australia), AMF (France), BaFin (Germany), CONSOB (Italy), FCA (United Kingdom), FSA (Japan), SEC (United States of America), SFC (Hong Kong), MAS (Singapore). SEBI (India) also provided input on regulatory developments affecting hedge funds over the past two years.
As a result of the questionnaire being broadly the same as in the 2013 Survey, it allows for the tracking of developments in the hedge fund sector between September 2012 and September 20142.
This report summarizes the findings of the September 2014 data, and attempts an analysis of some of the key developments in the global hedge fund sector.
The report follows the same broad layout as the previous IOSCO Hedge Fund Survey (2013). Chapter 2 presents an overview, outlining the Survey’s objectives and methodology and the main improvements of this exercise. Chapter 3 considers new regulatory developments relevant to hedge funds across a number of jurisdictions over the last two years. Chapter 4 presents the findings of the Survey. It splits into two sections: the first section presents findings that are based on data submissions by all participants, whereas the second section only benefited from partial data submissions, due to data availability issues and/or confidentiality concerns.
Highlights of this Survey
The findings of the 2015 Survey, which captures a significant share of the global hedge fund industry, can be highlighted as follows:
- The Survey suggests that assets under hedge fund management appear to be growing at an impressive pace of 34% since the last Survey. Some of this growth may reflect more widespread and accurate reporting across all jurisdictions, in addition to asset value changes and net inflows, and structural changes such as the consolidation of smaller funds.
- The hedge fund industry is largely concentrated in the US, whilst the Cayman Islands continue to be the tax domicile of choice, boasting a larger number of new funds.
- Hedge funds remain mostly US Dollar based and – as of September 2014 – predominantly invested in North American assets. Although the use of multiple strategies is becoming increasingly popular, most of these appear to be equity-based.
- Financial leverage is used by hedge funds across all jurisdictions, except in Japan; comparisons of synthetic and gross leverage are only indicative due to different leverage metrics used by the jurisdictions.States of America), SFC (Hong Kong), MAS (Singapore). SEBI (India) also provided input on regulatory developments affecting hedge funds over the past two years.
- There does not appear to be a significant liquidity mismatch in hedge funds against the backdrop of the September 2014 “normal” market conditions based on reported data. Hedge funds seem aware of the market liquidity of their portfolio positions, and they generally can make use of suspensions and gating to manage investor redemptions.
Other highlights, based on a subset of the data3, are as follows:
- Performance of surveyed hedge funds has been overall positive between September 2013 and September 2014, where the average net investment return across the sample was 10.89%. No hedge fund lost more than 15%, whereas 18% of funds achieved more than 15% in net investment returns.
- Two-thirds of the surveyed hedge funds use Value at Risk as a risk management tool, reporting mean VaR values ranging between 4% and 21% across jurisdictions.
- Institutional investors account for a significant proportion (31%) of direct investments in hedge funds, with the remaining share dominated by fund of funds.
- Actual re-hypothecation of collateral posted and received by hedge funds remains significantly under the potential level of re-hypothecation.
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