Hedge funds and Private Equity - PES

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The European Commission should establish robust minimum standards with respect to the
following:
rules on valuing hard-to-value, illiquid assets so that investors can be reassured that asset
prices used in valuations are fair and independently obtained. These rules should apply to all
internal and external parties in the valuation chain including fund managers, administrators,
providers of market prices, verification staff, and auditors;
the frequency and basis of valuations;
the use of portfolio stress testing to establish valuation parameters;
the relationship between internal and external parties involved in the valuation process to
manage conflicts of interest and ensure a clear separation of duties between fund managers
and those providing support services;
the use of independent ratings and valuation agencies to communicate overall risk to
investors.
The EC should set up an independent expert working group consisting of consumer and public
interest, representatives from corporate business, social partners and industry representatives to
establish proposals for these minimum standards.
3.4 Systemic risks
As well as posing considerable potential risks to individual investors (or pension funds),
concerns have been raised about wider market or systemic risks – in particular, financial
stability, market disruption and disorderly markets (due to liquidity risks) and lack of transparency
which can undermine regulatory effectiveness.
To promote better management of these systemic risks the EC should introduce new requirements
for national regulators to improve reporting procedures. These should include:
a requirement for national regulators to publish regular assessments and analysis of the
concentration of hedge fund investments in sectors;
detailed reporting requirements for individual firms. Firms should be required to report detailed
information with regard to positions and investment strategies to their national regulator;
The EC should create a centralised mechanism to allow for consolidated assessment of
market positions and analysis of systemic risk.
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As far as financial stability is concerned, the link between credit and liquidity risk is the gist of
the matter. To make indirect regulation of credit risk via banks workable, monitoring the extensive
use of derivatives is crucial. The global hedge funds’ leverage is ruled by a very restricted
number of prime brokers. So the first task of financial authorities should be to ask prime brokers
for a periodic full disclosure of the exposure (fund by fund and then of the whole client base) to
different categories of financial risks. Potential future credit exposure should be measured and
stress testing performed.
In order to protect retail investors, promoters and intermediaries should be required to include
scenarios in any promotions illustrating the impact of adverse market movements on investors’