Executive summary - Udo Bullmann

Tendency of crowdingWhere HFs are pursuing similar strategies, there is a similar risk that they will buy or selltheir positions at the same time - thereby disturbing liquidity, i.e. the normal drive of supplyand demand. Such behaviour could in turn leave HFs and their co-operators like banks andinstitutional investors highly vulnerable to adverse market dynamics. Even in cases ofstrategy differences, our calculations and analyses show that there is still a strongcorrelation among HF actions on the financial markets.The ECB has highlighted this crowding problem recently in its 2006 financial stabilityreport: “The fact that correlations are trending higher not only within some strategies, butalso among strategies, raise concerns that a triggering event could lead to highly correlatedexits across large parts of the hedge fund industry”.Short-term versus long-termMost of private equity engagement in companies, especially through leverage buy-out,plans for a time horizon of 3-4 years, often even shorter.Rating agencies such as Standard & Poors have analysed the big LBOs with the followingresult:o In 2004 the LBOs got 64% of their invested capital back just after 29 months.o In 2005 PE LBOs got 27% of their invested capital back in just 20 months.o In the first half of 2006 PE LBOs have got 86% of their investment back in just 24months engagement in the target company.Lack of transparency and disclosureAlmost all accessible reports on hedge funds and private equity published in the past twoyears underline the lack of transparency and disclosure. The G7 meeting for financeministers in Essen, in February 2007, decided to ask the International Financial Forum tohave a closer look at transparency problems in the HF industries. In the report we show thatthe vast majority of hedge funds and private equities are established in offshore centres forreasons of “light regulation and tax-minimising reasons”. In the global economy, marketimperfections on financial markets can have far reaching consequences but effectivemonitoring against market abuse, asset assessment, accountability, early warning etc. issimply not possible without transparency.10