MFA Blog

After the Crisis: Five Steps to Encourage Investment and Growth Now

Posted on November 2, 2018

Op-ed on Stimulating Investment and Growth

Richard H. Baker

President and CEO, Managed Funds Association

In the decade since the financial crisis, the economy has accelerated, markets have recovered, and a sweeping set of reforms has modernised the regulatory framework of the global financial system.

The hedge fund industry has changed as well. Today, the industry manages a record $3.6 trillion in assets, the majority of which come from large institutional investors like pensions, charitable endowments, and universities.

These sophisticated investors rely on hedge funds to manage risk and volatility in their portfolios while earning reliable, risk-adjusted returns over time.

As a result of the Dodd-Frank Act and new legislation in Europe, hedge funds are more transparent and regulated than ever. While implementation of Dodd-Frank is largely complete, the work to help ensure efficient, transparent, and fair capital markets is never done.

As policymakers evaluate the current state of the financial system, it is important that they keep intact policies that work well, fine-tune those that do not, and make sure new ones recognise the unique nature of investment firms.

In that spirit, we believe there is more to do in five key areas:

Safeguarding confidential data collected by regulators
Hedge funds registered with the SEC, CFTC, or under European law provide regulators with sensitive, often proprietary information, including the confidential investment analyses that guide their trading strategies.

The disclosure of this material, whether by breach or accidental release, could damage a firm, its investors, and the market as a whole.

Firms invest significant resources in protecting this intellectual property and we believe regulators should take steps – including using alphanumeric identifiers rather than firm names – to ensure its security when they collect and store it, if they have to keep it at all.

In fact, regulators ought to review and limit the types of sensitive information they collect on a routine basis to reduce cyber risks and unnecessary burdens.

Streamlining registration and compliance practices 
US regulators should streamline oversight of fund managers that are required to register with both the CFTC and SEC.

Requiring these managers to report similar information through different methodologies and to comply with two sets of regulations that address the same issues makes regulation unnecessarily expensive, complicated, and burdensome for both the managers and the government.

Regulators should work together to take a harmonised approach to regulation to enhance oversight and maximize resources.

Providing equal market access for all participants
In efficient markets, professional investors can access the best money managers and investment strategies across the world.

Unfortunately, policymakers in Europe have proposed measures that could jeopardize investor access to certain fund managers.

Similar efforts would restrict investment managers’ access to central clearing of derivatives.

In the US some institutional investors are discouraged from monitoring investments in companies due to federal antitrust regulators’ overly broad interpretation of what constitutes an investor’s intention to participate in a company’s management, chilling proper management-shareholder communications.

We believe policymakers should protect investor choice and ensure all participants have equal access to markets.

Recognising the unique nature of investment firms
The hedge fund industry is significantly smaller and less leveraged than the banking sector.

Regulators in the US and Europe should take that into account as they set position limits or assess whether the activities of any institution pose a systemic risk.

In addition, policies and regulations should expand access to and lower the cost of central clearing, a key goal of the post-crisis reforms.

One such step would be to amend the supplementary leverage ratio to recognise the risk-reducing benefits of initial margin investors post on cleared derivatives.

Ensuring the tax system encourages investment and growth
Implementation of the Tax Cuts and Jobs Act will carry on for years.

The MFA will continue to work to ensure changes to the code do not discourage investment or impose unnecessary burdens.

For example, we believe the IRS should clarify that funds can continue to deduct investment interest expenses, as they have for years.

Many of these recommendations were included in the US Treasury’s report on capital markets.

These straightforward steps will help stimulate further investment and growth – and in turn, help institutional investors generate returns to provide for retirement security for public servants, make college more affordable, and invest in their communities.