Ahead of the Curve covers developments that may impact the behavior and portfolio positioning of institutional investors. Take a closer look at events in the ever-changing regulatory, legislative and investment markets to determine how they may impact you.
A new working paper calls for charging central banks in each country with the responsibility of preserving the stability of the overall financial system rather than the health of individual institutions. This approach would help not only manage systemic risk, but also prevent financial crises.
The paper, â€śA Systemic Regulator for Financial Markets,â€ť was authored by the Squam Lake Working Group on Financial Regulation of the Council on Foreign Relations (CFR). The group argues financial regulations in almost all countries are designed to ensure a focus on institutions, principally commercial banks. This focus has two dangerous consequences. First, this focus on individual firms ignores critical interactions between institutions. Second, a focus on individual firms can cause regulators to overlook important changes in the overall financial system. The working paper makes five recommendations for correcting the situation:
The Squam Lake Working Group is a nonpartisan, nonaffiliated group of 15 academics that offers guidance on financial regulation reforms. This is the fourth in a series of working papers distributed by the CFRâ€™s Center for Geoeconomic Studies. To download the complete series of Squam Lake working papers, go to cfr.org.
Hedge funds will need to alter their business and operating models if they are to reverse the outflow of assets that began in 2008, according to research by management consulting firm Casey Quirk.
In its April 2009 research paper, â€śThe Hedge Fund of Tomorrow: Building an Enduring Firm,â€ť the firm states hedge fundsâ€™ recovery and future prosperity depends on successfully aligning the interests of investors, firms and investment teams. â€śFuture alignment structures will match investor liquidity needs, portfolio liquidity, investment horizon, performance measurement and payout periods,â€ť the paper concludes.
Casey Quirk forecasts hedge fund assets will reach almost $2.6 trillion in 2013, with North American institutions the greatest source of growth. The firm also expects funds of hedge funds will remain the primary hedge fund distribution channel, receiving about 60% of net asset flows between 2010 and 2013.
For more information and a copy of the research paper, go to caseyquirk.com/knowledge_center.
The tumultuous events in the money market fund (MMF) industry during September and October 2008 have sparked calls for regulatory changes worldwide. In the United States, the Investment Company Institute formed an MMF working group that published recommendations for the industry in March. Those recommendations were:
The Securities and Exchange Commission has proposed amendments to the rules governing MMFs under the Investment Company Act. The SEC is accepting comments on its proposals until Sept. 8.
In Europe, the Institutional MMF Association (IMMFA), which represents variable net asset value funds, also has formed a working group to study the future structure of those products.
U.S. defined contribution (DC) plan participants have been using their retirement savings as a funding source during the current financial crisis, but that activity appears to be tapering off, a survey by Watson Wyatt Worldwide finds.
The survey of human resource executives at 179 U.S.-based companies found 35% of employers saw an increase in hardship withdrawals taken in June 2009, down from 44% in April 2009 and the same level of activity as February. The percentage of employers seeing an increase in hardship withdrawals was 16% in December 2008 and 15% in October of that year.
Similarly, the number of loans from 401(k) and 403(b) plans seems to be leveling off. About half of the employers surveyed, 47%, saw an increase in loan activity in June, the same percentage as in April of this year. That is up slightly from the 45% of employers in February and still significantly higher than the 27% reported for this past December 2008 and 19% for October 2008.
The most recent update of the survey, â€śEffect of the Economic Crisis on HR Programs, Update: June 2009,â€ť can be found at watsonwyatt.com.
A survey from Deloitte Touche Tohmatsu finds a significant number of venture capital firms are changing their investment strategies to focus on later-stage opportunities and existing portfolio companies.
The survey, â€śGlobal Trends in Venture Capital 2009,â€ť found 44% of venture capital firms with more than $1 billion in assets under management were switching to later-stage opportunities. That compares with 39% of firms with $500 million to $1 billion in assets, 35% of firms with $100 million to $499 million, 30% of firms with $50 million to $99 million and 34% of firms with less than $50 million.
In terms of industry focus, clean technologies was the clear winner, with 63% of respondents expecting to increase investments in the segment. Semiconductors, including electronics, had the largest expected decrease, with 50% of respondents anticipating a decreased investment.
The global survey of general partners at venture capital firms received 725 responses, which were grouped by firm size. Of those responding, 44% were from the United States, 21% from continental Europe, 16% from Asia-Pacific, 10% from the Americas (excluding the U.S.), 7% from the United Kingdom and 2% from Israel. For more information, visit deloitte.com.