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Basel ii and Hedge Funds
Everybody seems to remember the 1998 crisis over Long-Term Capital
Management, the Greenwich (Conn.) hedge fund. Nobody seems to
learn something from the 50 best performing hedge funds.
LTCM was
founded in 1994 by John Meriwether (the former vice-chairman and
head of bond trading at Salomon Brothers). Board of directors
members included Myron Scholes and Robert C. Merton, who shared
the 1997 Nobel Memorial Prize in Economics.
LTCM
failed - in 1998 it lost $4.6 billion in less than four months.
Before this failure, it was enormously successful with annualized
returns of over 40% in its first years.
Regulators try to avoid a repeat of the LTCM debacle. Although
they can not regulate hedge funds directly, they try to egulate
them indirectly through the banks that supply them with credit.
And here comes Basel ii.
Regulators ask for more disclosure (Pillar 3 is an opportunity for
them), and demand leveraged players to sell assets when prices
fall.
Some disclosure is meaningful, but too much disclosure is too
dangerous for hedge funds. There are always some that copy the
strategies and the investments of the best in the field.
Disclosure is important under Basel ii, but it is not going to
solve the problem.
If lenders know for example that a hedge fund needs to sell
something quickly, they will sell the same asset--driving the
price down even faster.
Goldman, Sachs & Co. and other counterparties to LTCM did
exactly that in 1998. Goldman said that the firm acted honorably
and had no confidential information.
Basel ii
loves Value at Risk. It is a good method (for some risks) and an
opportunity to communicate numbers with the board of directors and
the regulators, but it can also be a very dangerous and misleading
method. Using Value at Risk for capital allocation is a good
method, but... banks must
sell assets when they have problems. They sell into a down market.
All together. A recipe for disarter - remember the panic during
the Asian contagion of 1997.
To learn more you
may visit:
www.hedge-funds-compliance.com
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Regulatory Arbitrage Opportunities after Basel II
Basel ii is a mandatory framework which is
full of differences
(different approaches, different deadlines, different options,
different national discretions etc. )
When we have all these different approaches and options by design
(Basel ii is proud of that), we also have "flexible" countries
that create opportunities...
... and "non-flexible" countries (compliance is just an
obligation).
Hedge Funds select the more favorable jurisdictions, playing one
government off against another. Is it fair? Absolutely!
The "flexible" countries know that. They have a plan, to retain or
attract foreign direct investments. They know that hedge fund
managers like shopping, especially "regulator shopping". They try
to find the friendliest regime to do business.
The "non-flexible" countries complain. They say that a general
easing of regulations is a "race to the bottom". And, they
continue to lose money, jobs, investments.
Basel ii is supposed to be the framework that attempts to align
economic and regulatory capital more closely to reduce the scope
for regulatory arbitrage. At least, this is what they say. But,
you can not have so many differences (approaches, deadlines,
options and national discretions) and the same time to say that
you try to reduce the scope of regulatory arbitrage!!! This is an
oxymoron.
Example:
By providing at least three alternative capital calculation
methods, Basel II creates
differences that do not exist in Basel I. The treatment of
non-investment-grade credits
under the standardized approach is so different from the treatment
under the foundation or advanced internal ratings based (IRB)
approach.
To learn more you
may visit:
www.regulatory-arbitrage.com
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Become a
Certified Basel ii Professional (CBiiPro)
Basel ii Distance Learning and
Certification
The Cost:
US$ 297
What is included in this
price:
A.
The official presentations we use in our
instructor-led classes (1880 slides)
The
presentations have been updated after the Basel ii Amendment (July
2009, Enhancements to the Basel II framework, Supplemental
Guidance)
B. Up to 3 Online Exams
There is only
one exam you need to pass, in order to become a
Certified Basel ii
Professional (CBiiPro).
If you fail, you must study again
the official presentations, but you do not
need to spend money to try again. Up to 3 exams are included in
the price.
To
learn more you may visit:
www.basel-ii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf
www.basel-ii-association.com/Certification_Steps_CBiiPro.pdf
C. Personalized Membership Certificate printed in full colour.
Processing, printing, packing and posting to your office or home
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