In 2008, the International Organisation of Securities Commissions (IOSCO) set up a task force for unregulated financial entities to support G-20 initiatives. This support was intended to help reduce the risks typically associated with unregulated financial entities, and to set up a regulatory framework from within which to deal with these risks.
Hedge funds were, at least initially, first on the hit list. A report was published (Hedge Funds Oversight, June 2009) that offered up six recommendations for hedge funds and their managers so that the global management of hedge funds was consistent.
The fourth recommendation was that hedge fund managers/advisers would be required to give regulators frequent updates for systemic risk purposes, resulting in the IOSCO Hedge Fund Survey. This allows global collection and sharing of hedge fund data, activities, and risks. This survey is the only one of its kind.
Over time, legal constraints in collecting the required information have been overcome to a greater or lesser degree (and continue to be improved), so the survey results have become more useful. Participation has increased, particularly in the US, where most hedge funds are based.
The data in this report is from September 2014, with most solid data being comparable from 2012 through to 2014.
The survey appears to show that assets under hedge fund management have grown at a rate of 34 per cent since the 2013 survey. This could be due to better reporting (more accurate and wider spread), and changes in net inflows and asset value. It may also show the results of structural changes, for example those that might occur with the consolidation of smaller funds that previously weren't included in the survey. The minimum is US$500 million.
The United States is the location of choice for most hedge funds, with the Cayman Islands the tax home of choice – more new funds are based there than any other place, with US coming in second.
Hedge funds are sticking to the US dollar, and data from the last survey shows that most are invested in North American assets. Often, the strategy is equities-based.
Hedge funds across all jurisdictions use financial leverage, except the Japanese. There are differing leverage metrics used by each jurisdiction, and in some areas the samples are not directly comparable – the information offered up is voluntary by qualifying funds. Data also may not be comparable across certain time periods.
There doesn’t seem to be a significant liquidity mismatch in hedge funds under September 2014’s ‘normal’ market conditions, as reported. Hedge funds are aware of the market liquidity of their portfolios, with funds making good use of suspensions and gating for managing redemptions.
The overall performance of hedge funds has been, overall, positive for the year September 2013 to September 2014. The average net investment return for the surveyed sample was 10.89 per cent, with no fund losing more than 15 per cent. Eighteen per cent of funds achieved more than 15 per cent in net investment returns.
Value at Risk as a risk management tool is used by two-thirds of the hedge funds surveyed, with these funds reporting mean VaR value that were spread from 4 to 21 per cent across jurisdictions.
Institutional investors make up 31 per cent of direct investments in hedge funds. The rest is dominated by fund of funds.
Re-hypothecation of collateral posted and received by hedge funds is still significantly under the potential level of re-hypothecation.