Key Takeaways
- • Managed Funds Association president and CEO Richard Baker called Gary Cohn's Davos regulation remarks "just false," stating that hedge funds are regulated and did not cause the financial crisis or take bailout money.
- • Goldman Sachs president Gary Cohn warned at Davos that tighter bank regulation would push risky activities into the "shadow banking sector," which he described as "less regulated" and "opaque."
- • Some hedge fund managers, including Goldman clients, criticized Cohn's remarks; one accused him of acting "cynically" to distract regulators, noting Goldman was "the biggest hedge fund in the world" until 18 months earlier.
- • The SEC and CFTC passed rules requiring US hedge funds managing more than $1 billion to file detailed quarterly information on portfolios, investments and strategies.
Summary
Leading hedge fund managers have pushed back against calls for tougher regulation of their industry made by Gary Cohn, president of Goldman Sachs, during a panel discussion at Davos on Wednesday. Cohn warned that stricter regulation of banks would drive risky activities into the "shadow banking sector," which he characterized as "less regulated" and "opaque." According to the Financial Times, the remarks were understood to be unprepared, as Cohn spoke in a small panel session. Goldman did not respond to requests for comment.
The comments drew sharp criticism from prominent figures in the hedge fund industry, including some of the bank's own clients, who interpreted them as an attack on their activities. Richard Baker, president and chief executive of the Managed Funds Association, the industry's main trade association, told the Financial Times: "These statements are just false. Hedge funds are regulated. We didn't cause the financial crisis. We didn't take bail-out money." Baker added that the recent crisis was caused by overleveraged institutions that failed to manage risk, and expressed concern that future failures could stem from the same institutions not learning from past mistakes.
One large hedge fund client of Goldman called the remarks "ill-judged and ill-informed." Another manager accused Cohn of behaving "cynically" to deflect regulatory attention, pointing to Goldman's former proprietary trading operations, which allowed the bank to speculate with its own capital. New US rules have forced Goldman to wind down those internal trading operations, prompting a number of traders to leave and set up their own funds. The criticism comes at a sensitive time, as the bank's prime brokerage business, which handles accounts and trading for hedge funds, is one of its most lucrative operations.
Despite the anger among some clients, few expect the remarks to materially affect broader hedge fund regulation. European politicians have already passed the Alternative Investment Fund Management Directive to regulate the industry. In the US, the SEC and CFTC on Tuesday passed new rules requiring all US hedge funds managing more than $1 billion to file detailed quarterly information on their portfolios, investments and strategies.
The comments drew sharp criticism from prominent figures in the hedge fund industry, including some of the bank's own clients, who interpreted them as an attack on their activities. Richard Baker, president and chief executive of the Managed Funds Association, the industry's main trade association, told the Financial Times: "These statements are just false. Hedge funds are regulated. We didn't cause the financial crisis. We didn't take bail-out money." Baker added that the recent crisis was caused by overleveraged institutions that failed to manage risk, and expressed concern that future failures could stem from the same institutions not learning from past mistakes.
One large hedge fund client of Goldman called the remarks "ill-judged and ill-informed." Another manager accused Cohn of behaving "cynically" to deflect regulatory attention, pointing to Goldman's former proprietary trading operations, which allowed the bank to speculate with its own capital. New US rules have forced Goldman to wind down those internal trading operations, prompting a number of traders to leave and set up their own funds. The criticism comes at a sensitive time, as the bank's prime brokerage business, which handles accounts and trading for hedge funds, is one of its most lucrative operations.
Despite the anger among some clients, few expect the remarks to materially affect broader hedge fund regulation. European politicians have already passed the Alternative Investment Fund Management Directive to regulate the industry. In the US, the SEC and CFTC on Tuesday passed new rules requiring all US hedge funds managing more than $1 billion to file detailed quarterly information on their portfolios, investments and strategies.
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