The G7 Finance Ministers will be meeting representatives of the hedge funds this weekend to discuss the issue of transparency for these funds. At first sight, there seems to be a strong case for requiring hedge funds to disclose their investment policies in much the same way as ordinary publicly held investment trusts and that may well be the attitude of the G7. Secrecy is always open to abuse.
When they started, in the 1980s, hedge funds avoided disclosure on two grounds. Most of them were indeed organised by fund managers in major financial centres, such as George Soros in New York, but they were registered in off-shore centres with low requirements and light supervision. They were sold to sophisticated and wealthy investors who were thought able to look after themselves.
However, hedge funds have become more popular and more powerful. Their methods have also become more difficult for investors, even very sophisticated investors, to follow. Warren Buffett himself has said that he does not understand all the derivatives which are used. When a highly leveraged speculative hedge fund is using obscure derivatives nobody outside the management team is at all likely to know what is going on. High speculative risks are legitimate, but should be disclosed and understood.
However, the hedge funds are not the only types of fund which may be under pressure for greater transparency. The whole world of derivatives is only indirectly regulated through the banking system. It is certainly possible that there might be a derivatives crisis, if only because of their high level of leverage, and the sheer intellectual complexity of their structures.
There is also private equity. In London, the C.V.C. bid for J. Sainsbury seems, for the moment, to have met with a rejection by the Sainsbury family. If, however, that bid had succeeded, J. Sainsbury would have ceased to be a public company, with all the reporting requirements that implies. Sainsbury’s suppliers, staff and competitors would all have suffered from the reduction of information about a business which plays a major part in the United Kingdom economy.
Lord Sainsbury of Preston Candover, who was, until he retired, an extremely successful chief executive of Sainsbury’s, says that he will not accept the private equity bid “on principle”. As a family business, Sainsbury’s has been run for the long term; there must have been many moments in the last century when the short term interest of the shareholders and the long term interest of the business seemed to diverge.
Patience is the virtue of businesses with an element of family control. It takes time to build a good business, whether it has a turnover in billions or only in millions. Private equity operates inside a short time scale of four or five years, and aims at immediate results. For some businesses that aspect of private equity is what is needed, but for other business it destroys longer term prospects. The public has an interest in transparency both for private equity and for hedge funds.
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