Hedge funds’ take on the wide array of new regulations being proposed for CDOs, credit default swaps and derivatives, in addition to taxes on risk retention, is simple: Bring it on.
With new regulations will come more investment opportunities, and even if bulge-bracket banks cease to be the major sources of capital, hedge funds stand to benefit, said speakers at the Bloomberg Markets Hedge Fund Summit: “Back From the Brink,” in New York earlier this month.
“Hedge funds will be able to take advantage of that tension,” said Mark Standish, president and co-CEO of RBC Capital Markets.
As far as derivatives are concerned, Blackstone Group Senior Managing Director John Studinski praised them as “the lightening rod of the financial services industry. They will have a much bigger impact on individual business models.” He added that he has been encouraged by individual companies, including food and pharmaceuticals, being forthcoming with Congress about this fact.
Andrew Feldstein, CEO and chief investment officer of BlueMountain Capital Management, said the “complete decimation of buying credit — through MBS, monolines, CLOs, banks’ exposure, ABCP conduits and secured bonds replacing secured loans” is reinventing capital markets.
Looking abroad, Allistair Lumsden, chief investment officer, ABS, at CQS Capital Management, foresees extensive global deleveraging for the next six to seven years. “We are in a totally bizarre cycle, a credit contraction cycle. We are only 18 months in. It’s only the third inning,” Lumsden said.
Basel III, which addresses capital, liquidity and leverage, will raise banks capital requirements to the $2 trillion to $4 trillion range, Standish said. “This will impact the availability of pricing and credit. There are two parts to regulatory reform: Wall Street and Basel III,” Standish said.
Hedge fund managers also noted that the picture being painted of corporate America and the U.S. economy is far too fatalistic. “New York is still the biggest capital market, and the U.S. is still the biggest market,” Studinski said. “Asia has a long way to go before it has the same degree of transparency.”
Hedge funds are concerned, however, that the financial reform bill may “discourage capital from being concentrated within North America,” Studinski said. “Washington would like a black-and-white solution [which could have] unintended consequences,” Studinski said.