The hedge fund industry is facing increased regulatory scrutiny in light of the Bear Stearns debacle, the ongoing credit crisis and Bayou Group founder Samuel Israel’s flight from the law, Eric Mindich, CEO of Eton Park Capital Management, said.
Although hedge funds are not the primary cause of the recent market turmoil, regulators and legislators are looking for ways to prevent the next financial crisis, and that could impact on the hedge fund industry, according to Mindich, who also chairs the asset manager’s committee of the President’s Working Group on Financial Markets.
Speaking to industry participants yesterday at a Securities Industry and Financial Markets Association conference, Mindich said hedge funds have a duty to adere to best practice guidelines recommended by his committee, which called for hedge funds to improve disclosure and risk management and set up independent valuation committees.
However, Mindich admitted that some of these recommendations are going to require real work on the part of the industry, because “none of us today currently do all of these things, but we think it’s critical that hedge funds step up and adopt sound practices.”
“In some ways, the valuation stuff is going to be a challenge for folks while the conflicts of interest may be a real challenge for others,” he said.
He also conceded that the report recognizes that it is a diverse industry and not every recommendation is applicable to every hedge fund.
“We recommend that managers adopt the recommendations but be prepared to explain away to investors why they choose to not adopt all of the recommendations,” he said.