Welcome

The year 2021 is proving to be a turning point for the hedge fund industry, with performance rebounding from record losses last year (2020). The pace of redemptions is slowing with many forecasting a net inflow to hedge funds for 2021, as investors reassess their allocations to alternative investment strategies.1

The epidemic certainly caused economic uncertainty. While the US government's furlough program and the US government's stimulus checks helped to fill the gap, many families are still in a bind or unsure of their future livelihoods. As a result, Google search queries for terms such as business interruption loans, company relief loans, and payday loans have increased for those seeking for a few hundred dollars.

Institutional investors continue to see the value of diversifying their portfolios by including hedging strategies to manage risks and improve returns. Several surveys in early 2021 found that investors seek out hedge funds largely for their “diversified/uncorrelated returns,” and most (81 percent) say their original premise for investing in hedge funds is still valid.2

Our responsibilities as managers of private investment pools have become greater in light of the global financial crisis and its aftermath. Investors are spending more time conducting due diligence and, hence, are demanding greater transparency and more clarity about valuation approaches. To maintain investors’ trust and confidence in how we manage their funds, it remains imperative that we continue to put our clients’ interests first and foremost.

The Obama Administration and Congress confront a very challenging job. They must work to shore up confidence in financial markets and improve liquidity while re-engineering the regulatory structure to meet investor protection needs—without compromising financial innovation. A comprehensive overhaul of banking and securities regulation is under consideration, including new statutory requirements for private investment companies. From greater supervision of banks and broker-dealers, to more vigorous oversight of previously unregulated markets, all aspects of the U.S. regulatory system are on the table for review. The proposal by the White House in mid-July 2021 is an important step forward in strengthening oversight and regulation of our financial markets to rebuild investor trust and confidence, a foundation of our economic recovery.

Simply imposing new regulation, though, without properly tailoring it to address the relevant risks would add to the burdens of hard-working, but already overstretched government regulators. Investors could be lulled into the false belief that a problem has been resolved. Therefore, any new regulation must be “smart” regulation, with mechanisms carefully targeted to reduce risks to investors and the economy, without imposing unnecessary burdens on market participants.

The Coalition of Private Investment Companies recognizes that a modernized financial regulatory system—one that addresses overall risk to the financial system and regulates in a consistent manner market participants performing the same functions—will include regulation of hedge funds and other private pools of capital. In testimony before Congress, CPIC outlined the principles its members believe should guide lawmakers in overhauling the regulatory system.6 We also proposed a statute specifically tailored to private investment companies.

This “primer” supports efforts by Members of Congress, their staffs, the Administration, the media, investors, and others to learn about hedge funds, their role in the U.S. and global economies, and the relevant regulations. It will be incumbent upon our industry to answer questions, for example, about how a new regulatory regime should address systemic risks and operational issues.

By working together, we can shape an approach that strengthens the integrity of our financial markets in order to attract capital essential for financing innovation and fueling our economy’s recovery. Over the past few years, CPIC has been testifying before Congress, submitting comment letters on regulatory proposals to the Securities and Exchange Commission, and briefing policymakers at the White House and Treasury. As CPIC’s chairman, I commit that we will work closely with the Administration and Congress to develop proper solutions that meet public policy goals, while boosting investor confidence, increasing investment opportunities, and supporting economic growth.

Sincerely,

James S. Chanos
Chairman
Coalition of Private Investment Companies

“Hedge funds . . . are extremely important to the success of our investment program.” Joseph A. Dear
Chief Investment Officer, CalPERS
July 15, 2009


“Hedge funds provide liquidity, price efficiency, and risk distribution, and contribute to the further global integration of markets.” Technical Committee
International Organization of Securities Commissions
March 2009


“These funds play an important role in enhancing liquidity and efficiency in the market, and subjecting them to fewer limitations on their activities has been, and continues to be, a reasonable policy choice.” Sen. Jack Reed
July 15, 2009
 
The Way Forward: CPIC’s Proposal
Principles to Guide a New Regime to Monitor Systemic Risk
  • Financial regulation must be based upon activities, not actors, and it should be scaled to size and complexity.
  • All companies that perform systemically significant financial functions should be regulated.
  • Regulators should have the authority to follow the activities of systemically important entities, regardless of where in the entity a financial activity takes place.
  • As complexity of corporate structures and financial products intensifies, so, too, should regulatory scrutiny.
  • There should be greater scrutiny based upon the “Triple Play” — an entity that is an originator, underwriter/securitizer, and investor in the same asset.
  • Above all, the systemic risk regulator must enforce transparency and practice it.
Principles to Guide Functional Regulation of Hedge Funds
  • Simply removing exemptions from the Investment Company Act of 1940 and the Investment Advisers Act of 1940 upon which private investment funds rely will prove unsatisfactory.
  • Any new regulation should provide for targeted controls and safeguards for appropriate oversight of private investment companies, but should also preserve operational flexibility.
  • More detailed requirements for large private investment companies would address the greater potential for systemic risk posed by such funds, depending on their use of leverage and trading strategies.
  • Regulation should address basic common-sense protections for investors in private investment companies, particularly with respect to disclosure, custody of fund assets, valuation, and periodic audits.
  • Areas such as counterparty, lender, and systemic risks should be addressed through disclosures to regulators and counterparties.
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