Since the 2008-09 global financial crisis, regulators rolled out multiple, substantial regulations aimed at mitigating systemic risk. Over time, popular opinion has held that investors largely favor the new rules while managers of hedge funds uniformly oppose them. However, a survey from Northern Trust Hedge Fund Services reveals that investors and fund managers express surprisingly similar views on regulation.
In a white paper about the survey findings, Minimizing Risk or Missing the Mark, Northern Trust Hedge Fund Services found that managers actually voiced slightly more optimism than investors about the effectiveness of the regulations adopted in the last five years.
Fifty nine percent of managers said they believe at least some of the regulations implemented over the past five years have helped decrease the likelihood and severity of another financial crisis, while 53% of investors held that view. Forty percent of investors said the new rules haven’t done anything to reduce the chance of another financial calamity or its severity versus 34% of managers.
“The widely held belief that investors and investment managers hold conflicting views about regulation emerged because the regulations typically fell into two camps,” said Peter Sanchez, head of Northern Trust Hedge Fund Services. “They either changed market practices to limit what market participants can do, or they demanded more disclosure as a means of managing systemic risk. Dig a little deeper, however, and you discover – as the survey did – a far more nuanced and complex picture.”
At the same time, regulations vary widely both in terms of whom they affect and how they are implemented. These differences impact how market participants on both sides view them, the study indicates. Some changes are seen as providing benefits to managers and investors alike.
Managers indicated they are especially concerned about the impact of new rules when they are implemented by multiple regulators. An example is central repository requirements for derivatives. Since derivatives are a complex instrument and many countries or jurisdictions have varied rules and procedures around them, these regulations can pose compliance challenges. While these regulations have the goal of limiting market risk, they can also dampen potential industry innovation.