FRANCE - Introduction of IFRS standards and Solvency II on insurance companies are more likely to increase liquidity risk on investment markets than tightening the regulation of hedge funds, according to EDHEC business school.
A position paper has been issued by EDHEC's risk and asset management research centre in response to comments from French president Nicolas Sarkozy and German prime minister Angela Merkel suggesting hedge funds were to blame for the recent credit crunch.
More specifically, Noel Amenc, professor of finance and director of the research centre, said hedge funds are "clearly not to blame for the sub-prime crisis and the contagion has spread to all segments of the credit market", and instead suggests the credit crunch more reflected "a crisis of confidence in financial information and the market's capacity to evaluate the solvency of credit institutions".
He notes, in particular, loosely-regulated treasury funds, such as ‘ARIA' fund of funds, and hedge funds were better diversified and less risky than highly-regulated UCITS III or equivalent funds and euro money market funds, which are also supposed to be "extremely liquid" and "never supposed to lose capital".
Amenc instead warns these two new pieces of regulation could have a wider impact on market liquidity than the introduction of regulation for hedge funds, as both Sarkozy and Merkel have intimated.
"Upcoming regulations, notably the combination of IFRS standards and Solvency II for insurance companies, and perhaps for pension funds subsequently, will contribute to increasing liquidity risk on the markets by imposing short-term constraints that are both pointless and inappropriate for the liabilities of institutional investors…by forcing them to dissimilate the volatility of their investments in favour of instruments with extreme risks that are both very significant and difficult to measure," said Amenc.