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Hedge Funds in Denmark and Internationally

Jesper Ulriksen Thuesen, Financial Markets

Introduction and summary

At the end of 2004, the Danish government presented a bill to create a legal and supervisory basis for establishing "hedge associations" in Denmark. According to the bill, hedge associations will be the Danish equivalent of hedge funds. Like hedge funds abroad, hedge associations will have full freedom to determine their risk profile and investment strategy.

A substantial rise in the number of hedge funds and the capital they manage has led to increased international focus on the significance of hedge funds to the financial markets and financial stability. On the one hand, hedge funds increase liquidity and efficiency in capital markets, but on the other hand they can increase the risk of financial instability.

It is not assessed that hedge associations in Denmark will have negative consequences for the Danish capital markets and the stability of the Danish financial system.

Hedge funds and their prevalance

There is no clear, generally accepted definition of a hedge fund. The term covers a large number of different investment funds with very different risk profiles and investment strategies. Often they are private companies where a manager invests capital contributed by wealthy private individuals and in some cases institutional investors. In the USA, the following definition has been proposed:

"Although it is not statutorily defined, the term encompasses any pooled investment vehicle that is privately organized, administered by professional investment managers, and not widely available to the public."[1]

The ECB recently presented a slightly more extensive definition:

"A hedge fund can be defined as a fund whose managers receive performance-related fees and can freely use, and do use, various active investment strategies to achieve positive absolute returns involving any combination of financial leverage, long and short positions in securities, derivatives or any other assets in a wide range of markets. … Hedge funds represent a flexible business model rather than an alternative asset class"[2].

It is evident that neither of these suggested definitions is particularly precise. One way of describing what hedge funds are is to see them in relation to more narrowly defined and regulated investment schemes, e.g. investment associations. Box 1, p. 102, lists the typical characteristics of hedge funds compared with the corresponding characteristics of investment associations. It is seen that there are a number of significant differences, e.g. in their objectives and their opportunities to freely take positions in the markets.

The hedge funds' freedom to select their own strategy is reflected in the fact that in practice the various hedge funds have opted for highly diverging investment strategies in order to utilise their options to e.g. short-sell[3] in the market. Box 2, p. 103, groups some of these investment strategies. The various investment strategies on the face of it entail different levels of risk. However, an investment strategy entailing less risk may be combined with high gearing[4], so the choice of investment strategy does not necessarily in itself give a true and fair view of the risk profile of a given hedge fund.

Since hedge funds are typically registered in offshore financial centres[5] where they are not subject to reporting requirements, it is not known how many funds there are, nor how much capital they manage. Qualified estimates[6] are:

  • There are 8-9,000 funds in total, more than 6,000 of which operate in the USA.
  • The funds manage total assets of around USD 1,000 billion.[7]
  • In the last 10 years, the assets managed have increased by more than 25 per cent per year on average.
  • In the Nordic countries (primarily Sweden) hedge funds have existed since 1996 and there are around 80 funds, managing total assets of more than kr. 50 billion.

During the last 10 years, the managed capital of the hedge fund sector has only decreased in a few quarters, e.g. after the crisis relating to Long-Term Capital Management[8] at the end of 1998. Growth continued unabated in 2003 and into 2004, although the yields reported in this period were relatively modest, cf. Table 1.

ANNUAL PERCENTAGE YIELDS IN HEDGE FUNDS COMPARED WITH SHARES AND BONDS
Table 1
 
1999
2000
2001
2002
2003
2004
Hedge funds
40.3
8.4
6.3
0.1
18.6
7.7
Shares
21.0
-9.1
-11.9
-22.1
28.7
10.9
Bonds
-0.8
11.6
8.4
10.3
4.1
4.3
Note:  The yield is stated as the yield calculated on the basis of S&P 500 (for shares), Lehman Brothers Aggregate Bond Index (for bonds) and Van Global Hedge Fund Index (for hedge funds). This index is constructed on the basis of information on more than 6,000 hedge funds in and outside the USA.  

Source:  Van Hedge Fund Advisors International (2005).

There are a number of possible explanations for the strong growth in the number of hedge funds and the assets managed.

One major reason is presumably the added value to portfolios that placements in hedge funds have been able to contribute. In a long-term perspective, portfolios with hedge funds have often performed better than more traditional portfolios[9]. Hedge funds may have a relatively low covariation with the market in general and may therefore be used effectively for diversification of portfolio risks. Finally, targets for absolute yields and good opportunities to short-sell in the market may provide better protection of the capital in declining markets.

HEDGE FUNDS AND INVESTMENT ASSOCIATIONS
Box 1
  Typical hedge fund  Typical investment association
Target   Absolute yield(positive yield irrespective of market development). Relative yield(in relation to a benchmark).
Choice of investment strategies and instruments  Extensive freedom.Use of derivatives, gearing and short-selling.   Limited freedom.Limited opportunities to use derivatives, gearing and short-selling.
Liquidity   Restrictions on deposits and withdrawals, e.g. only once a month or quarter. Investment certificates can be bought and sold on an ongoing basis.
Managers   May be non-registered or registered and subject to supervision. Often based in international financial centres such as New York and London. Registered andsubject to supervision. 
Regulation       Typically legally domiciled in offshore financial centres with limited regulation and supervision. No or few reporting and transparency requirements.   Legally domiciled in ordinary national jurisdictions. Regulated and under supervision. Report-ing and transparency requirements.
Incentive structure    Manager fee: typically 1-2 per cent of assets plus 15-25 per cent of performance above certain threshold values. The manager is a co-investor.  Manager fee: fixed fee, e.g. fixed percentage of assets. The manager is the investors' agent, but not a co-investor.
Marketing   Restrictions on marketing to the general public.  Opportunities for broad marketing to the general public.
Source: ECB (2004), Plesner (2004), Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act, Directive 2001/108/EC of the European Parliament and of the Council, SEC Staff Report (2003).

Another explanation for the growth in hedge funds is presumably that the number of "high net worth individuals"[10] has increased. This group has traditionally accounted for a large proportion of the investments in hedge funds.

A third reason may be the low nominal level of interest rates and the development in the share markets. This may have led e.g. pension funds, which are bound by commitments to their policyholders on the liabilities side, to seek higher risk-weighted yields in alternative placements.

Hedge funds and financial stability

The growing importance of hedge funds in the international financial markets has given rise to discussion, particularly within the last year, of the significance of hedge funds to financial stability. This discussion can be complex at times. Firstly, it can be difficult to conduct analyses covering the entire population of hedge funds. The reason is the many different types of hedge funds and that the various hedge funds vary greatly in terms of both risk profiles and strategies. Secondly, most types of hedge funds could potentially have both a stabilising and a destabilising impact on the capital markets. Thirdly, hedge funds are typically neither subject to reporting nor transparency requirements imposed by the authorities. The data available about transactions, positions and yields therefore mainly comprises voluntary disclosure by parts of the hedge fund sector.

Hedge funds' contribution to well-functioning markets and spread of risks
By taking positions actively and trading frequently, hedge funds can contribute to liquidity in capital markets. In addition, the strategies, and thereby the analysis methods, of some hedge funds are aimed at utilising even small price imbalances in the market via arbitrage. This can contribute to reducing market imperfections and improving price formation.

Yields on investments in hedge funds have proved to be significantly less correlated with yields in the share and bond markets than e.g. yields in the share and bond markets with each other. The possibility of placements in different types of hedge funds can therefore increase investors' opportunities to diversify their portfolios. This has become increasingly valuable in step with the global financial integration, whereby the covariation between many other asset classes has increased, and the opportunities for effective diversification have therefore been curtailed.

It has also been pointed out that hedge funds can contribute to reducing market volatility. Their absolute yield targets could make them less inclined to buy in rising markets and sell in falling markets (i.e. momentum trading)[11]. Moreover, assets in hedge funds are often tied for relatively long periods and can only be withdrawn on e.g. a monthly or quarterly basis.

EXAMPLES OF DIFFERENT INVESTMENT STRATEGIES APPLIED BY HEDGE FUNDS
Box 2

1. Market trend strategies
These strategies utilise broad market fluctuations/trends. This can be in shares, interest rates, currencies or goods. Examples:

  • Macro: taking positions on the basis of analyses of macroeconomic developments, e.g. in exchange rates.
  • Long/short: utilising assumed imbalances in relative prices within the same class of assets. For instance, a hedge fund might buy a corporate bond that it believes to be priced too low and short-sell a corporate bond that it believes to be priced too high. The overall position may be neutral in relation to the market, so that the yield does not depend on changes in the level of interest rates, but only on changes in the relative prices of the two bonds selected. The classic hedge fund is an equity long/short fund, i.e. with short and long positions in shares within the same category, e.g. the same industry. This is still the type of strategy applied by most hedge funds, possibly around half of all hedge funds. They are not always market neutral and may rapidly shift from being net long to being net short.

2. Event-driven strategies
These strategies utilise price fluctuations in connection with liquidations, mergers and acquisitions. Examples:

  • Distressed securities: long- or short-selling on unusual price formation in connection with liquidations and company restructuring.
  • Risk/merger arbitrage: long-selling in an enterprise that will be acquired/taken over, combined with short-selling in the purchasing enterprise.

3. Arbitrage strategies
These strategies utilise price differences between closely related assets. Arbitrage strategies are deemed to be the strategies entailing the least risk and to have the most frequent positive impact on market efficiency and liquidity. Examples:

  • Convertible arbitrage: arbitrage on the basis of differences between the prices of an enterprise's preferred capital (convertible bonds, preferred stock, warrants, etc.) and the prices of the same enterprise's normal shares.
  • Fixed income arbitrage: utilising the small yield differences that may exist between almost identical bonds. For instance, a new government bond that has just become an on-the-run issue may have a slightly higher yield than an existing government bond with a large outstanding volume and virtually the same term to maturity.
  • Statistical arbitrage: arbitrage on the basis of assumptions that prices will converge to a historical norm that the fund's own model is expected to be better at predicting than the market.
Note:  There is no unequivocal or generally accepted way of grouping hedge funds by investment strategy. Various analysis units and databases operate only partly with the same groupings. The above grouping is mainly inspired by the SEC Staff Report (2003).

Finally, it has been pointed out that hedge funds have also contributed to greater risk diversification via the development of better risk-management tools and by providing liquidity for new and specialised markets.

Risks in relation to prime brokerage
Prime brokers are the investment banks that service hedge funds in connection with their activities in the capital markets. Some of the typical prime broker services are described in Box 3. A prime broker may be exposed to hedge funds both in terms of income from the services provided and in terms of the positions taken by the prime broker as counterparty to hedge funds.

PRIME BROKERAGE
Box 3

Prime brokers are the investment banks that service hedge funds in connection with their activities in capital markets. Hedge funds may work with several prime brokers at the same time. Prime brokers may e.g. offer one or more of the following services:

  • Trading transactions.
  • Clearing and settlement. A prime broker can handle clearing and settlement of transactions by the prime broker itself on behalf of a hedge fund, as well as transactions by other securities dealers used by the hedge fund in question.
  • Securities lending.
  • Margin lending.
  • Intermediation, i.e. the prime brokers arrange contact between the hedge fund managers and potential investors.
  • Start-up assistance for hedge funds. Prime brokers can assist new managers in relation to e.g. office premises, technical infrastructure, risk management systems, reporting systems, sales material and contacts with competent legal advisors and accountants.
  • Reporting. This could be ongoing reporting for the manager's supervision of the portfolio of the hedge fund, or generation of the information passed on to investors by the manager.
  • Analyses. Prime brokers can give managers access to their own analyses of markets and/or individual securities performed in connection with their own position-taking and client advisory services.
Source: SEC Staff Report (2003), Bank of England (2004:1) and (2004:2).

Due to the growing importance of the hedge fund sector, prime brokerage has become a substantial business area for several of the large international investment banks. The competition for this market has intensified, which could lead to a change in the revenue basis of particularly the banks that have dominated the market so far[12]. The increased competition may also entail that hedge funds will be able to negotiate more favourable credit terms, which could contribute to exposing prime brokers further.

The investment banks' professional management of counterparty risks vis-à-vis hedge funds, including the use of improved risk management tools, is the best possible protection against financial instability as a consequence of hedge funds. The investment banks must be assumed to be the most competent players in the market when it comes to comprehending the sometimes complex investment strategies of hedge funds and the associated risks. However, a given hedge fund may use several prime brokers, in which case the individual prime broker does not necessarily have access to full details of the overall positions of the hedge fund.

Risks in relation to the markets and hedge funds' gearing
There are indications that some of the large banks are now willing to increase their risks and to some extent adopt strategies resembling those of hedge funds for some parts of their own portfolios. This could amplify negative development tendencies in the markets, particularly if a large number of hedge funds and investment banks have similar positions that they want to close at the same time[13]. Whether such risks will materialise depends on e.g. the extent to which the various market players have similar positions, how highly the various hedge funds are geared and the hedge fund investors' opportunities to withdraw their investments. In practice the lack of statistical data on hedge funds, among other things, makes it very difficult to draw any conclusions in this respect.

Risks in relation to investors: private individuals and pension funds
High net worth individuals account for a large proportion of the placements in hedge funds. In recent years, however, pension companies – and to a lesser extent insurance companies – have placed an increasing share of their assets in hedge funds. The explanations are the opportunity to diversify portfolios by means of hedge funds and a tendency to seek higher yields via alternative placements, known as "hunt for yield". Compared to the total assets of the pension companies, placements in hedge funds are still small, however.

The increasing interest in hedge funds on the part of pension companies may have both positive and negative effects on financial stability. On the one hand, market-based "self-regulation" may be strengthened since pension companies to a greater extent than e.g. high net worth individuals must be assumed to have the resources to understand the strategies of the various hedge funds and to manage their own counterparty risks. In the longer term, pension companies may also contribute to greater transparency in the hedge fund sector since they are large individual investors and therefore carry more weight vis-à-vis hedge funds and are therefore in a position to request more detailed information. On the other hand, the increasing interest in hedge funds on the part of pension companies can lead to an increase in the number of large hedge funds if pension companies wish to make large single placements in order to reduce the administrative costs of monitoring and risk management in relation to the individual hedge funds[14].

The relatively high costs of assessing the risks and monitoring the often complex investment strategies of hedge funds may also limit the size of the total placements that pension companies and other institutional investors will make in hedge funds.

The emergence of "funds-of-funds", i.e. hedge funds investing in other hedge funds, may have helped to increase the placements of e.g. pension companies in hedge funds. Depending on the specific investments made in each fund-of-fund, such funds can be used to spread the risks on investments in hedge funds. It should, however, be taken into account that on top of the considerable fees payable to hedge funds, cf. Box 1, fees must also be paid to managers of funds-of-funds.

Supervision
The growth in the hedge fund sector means that an increasing proportion of the total assets is managed by units that are subject to neither reporting obligations nor supervision[15]. This makes it more difficult for supervisory authorities and central banks to monitor the market and to see whether there are any indications of emerging instability. The incomplete statistical data concerning the hedge fund sector may also inhibit the markets' ability to regulate themselves.

A possible future path to more systematic collection of data on hedge funds might be reporting from prime brokers.

Various assessments of hedge funds and financial stability
In the USA, where most of the existing hedge funds operate, there has been intense discussion of the potential effects of the funds on the market. After the difficulties involving LTCM in 1998, the "President's Working Group" was set up, comprising inter alia Alan Greenspan, Chairman of the Federal Reserve Board, and William H. Donaldson, Chairman of the U.S. Securities and Exchange Commission (SEC).[16] While Mr Greenspan has repeatedly emphasised the positive effects of the hedge funds on the market in terms of increased liquidity and market efficiency and has spoken against increased regulation of hedge funds, Mr Donaldson has been more concerned, particularly because the authorities have little opportunity to monitor the hedge funds. In October 2004, the SEC adopted a new set of rules entailing that from 2006 hedge fund managers (not the hedge funds) must register with the SEC and report the number of hedge funds and the size of the capital assets managed.

Hedge fund managers operating outside the USA are primarily concentrated in London. The Bank of England regularly discusses the issue of hedge funds and financial stability. Its latest statements seem to call for some degree of caution. For instance, the Bank of England questions whether the yield expectations of hedge fund investors are moderated as the markets become more efficient, inter alia as a result of the increasing activity of the hedge fund sector[17], making it more difficult to profit from the utilisation of market imperfections.

In its Financial Stability Review from December 2004 the ECB also discusses the issue of hedge funds without drawing any final conclusions. The positive impact of hedge funds on the markets is emphasised, as well as the development of more sophisticated risk-management systems. Moreover, the ECB points out that even though the overall hedge fund sector has been expanding significantly, the concentration on a few large funds has been reduced in relation to e.g. the situation at the time of the LTCM affair in 1998, and it looks as though today the gearing of hedge funds is lower.

Hedge funds in Denmark

Until now the establishment of actual hedge funds has not been permitted under Danish legislation. Among other things, the taxation aspects have been unclear. Since 1 January 2004 it has been possible to establish "other collective investment schemes". Unlike investment associations, these do not have limitations to their gearing and short-selling options. "Other collective investment schemes" must be registered with the Danish Financial Supervisory Authority, but the latter must neither license nor approve the schemes. Various constructions have been set up that have been referred to as hedge funds in the press, but in fact these have so far only been products wrapped in more or less complex bond structures and/or products reserved for pension savings for which the tax system is simpler.

Several elements of the Danish financial sector have expressed a wish to be able to establish regulated, supervised hedge funds under clearer and more internationally competitive tax conditions.

Bill on hedge associations
On 15 December 2004 the Danish government presented a bill to provide a legal and supervisory basis for hedge associations in Denmark. According to the bill, hedge associations will be the Danish equivalent of hedge funds and will be set up as associations according to the Danish model. The bill primarily relates to amendments to the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act, but also to the Financial Business Act and various tax acts. At the time of presentation of the bill it was expected that the new act would enter into force on 1 July 2005.

The bill does not envisage legal restrictions to the hedge associations' choice of investment policy and risk profile. It is up to the board of each individual association to determine its risk framework. As with hedge funds abroad, they will have unlimited opportunities for gearing and short-selling. Consumer protection will mainly consist in investors and the general public being able to familiarise themselves with the investment policy and risk profile of the association via its statutes and prospectus. If the board of a hedge association decides to adjust its risk framework, investors must be notified within five working days.

The bill does not include a definition of a hedge association. Hedgeassociations receiving funds from a broad group of investors or from the general public must be approved by the Financial Supervisory Authority. Other hedge associations may voluntarily seek approval by the Financial Supervisory Authority. Approved associations will have an exclusive right – and an obligation – to use the term "hedge association" in their names.

The Financial Supervisory Authority will supervise the approved associations. The funds of a hedge association must be managed and held by a custodian company, approved by the Financial Supervisory Authority, that must be a bank domiciled in Denmark, or a Danish branch of a foreign credit institution domiciled in the EU[18]. The custodian company must ensure that the association complies with its own risk framework. If it is exceeded, this must be reported immediately to the Financial Supervisory Authority.

The bill enables the Financial Supervisory Authority to lay down more detailed rules on hedge associations' publication of information, and rules on hedge associations' compilation of risks. These rules are not yet known.

The importance of hedge associations to financial stability in Denmark
In a narrow Danish perspective, there are no indications that the future hedge associations will entail a risk to financial stability. The size of the capital to be managed by Danish hedge associations is expected to be modest in relation to the overall Danish capital market. Likewise, the significance of prime brokerage will be limited. Investors are already able to gear and short-sell on an individual basis. Hedge associations will make it possible to do so via associations.

From a Danish perspective, any risk from international hedge funds would stem from rub-off effects from the international capital markets, where international hedge funds might amplify potential future crises. Such effects on the Danish financial market would, inter alia, depend on thevolumeof Danish assets held by international hedge funds. The existence of Danish hedge associations is not considered likely to reinforce any consequences for financial stability in Denmark.

LITERATURE

Bank of England, Financial Stability Review, December 2004.

Bank of England, Financial Stability Review, June 2004.

Donaldson, William H., The Long and Short of Hedge Funds: Effects on Strategies for Managing Market Risk, Before the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, United States House of Representatives, May 2003.

ECB, Financial Stability Review, December 2004.

Eidolf, Erik: Hedge funds – a question of confidence (in Danish), Danish Shareholders Association, Aktiehåndbog 2004.

Directive 2001/108/EC of the European Parliament and of the Council (the UCITS Directive).

Financial Stability Forum, Report of the Working Group on Highly Leveraged Institutions, April 2000.

Bill to amend the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act, the Financial Business Act, the Securities Trading, etc. Act, the Act on ATP (the Labour Market Supplementary Pension Fund) and the Act on LD (the Employees' Capital Pension Fund) (Hedge Associations) and the explanatory notes to the Bill. Presented to the Folketing (Parliament) on 15 December 2004 by the Minister of Economic and Business Affairs.

International Monetary Fund, Global Financial Stability Report, September 2004.

Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act.

Plesner, Søren, Hedge funds (in Danish), Finans/Invest, June 2003.

Plesner, Søren 2004, Hedge funds versus investment associations (in Danish), Aktionæren, June 2004.

President's Working Group, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management, Report of the President's Working Group on Financial Markets, April 1999.

Securities and Exchange Commission Staff, Implications of the Growth of Hedge Funds, Staff Report to the United States Securities and Exchange Commission, September 2003.

Van Hedge Fund Advisors International, van Hedge Fund Indices, Global, U:S: and Offshore, December 2004, Press Release of 14 January 2005. www.hedgefund.com/news/press/press.htm.

Vaughan, David, Selected Definitions of "Hedge Fund", Comments for the U.S. Securities and Exchange Commission, Roundtable on Hedge Funds, May 14-15, 2003.

[1] President's Working Group (1999).

[2] ECB (2004). For further examples of definitions, see Vaughan (2003).

[3] Short-selling means to sell assets that are not in the seller's portfolio at the time of sale. For a more detailed description of short-selling (in Danish), see e.g. Plesner (2003).

[4] The gearing of a hedge fund typically expresses the size of the capital contributed by the investors (and the manager) compared to the size to the total balance sheet of risk-related assets and liabilities. Typically hedge funds achieve gearing by using financial instruments such as repos, futures, forward contracts and other derivatives where positions can be taken by making margin payments instead of paying the full nominal value of the positions, cf. e.g. Financial Stability Forum (2000).

[5] The Cayman Islands, the British Virgin Islands, Bermuda and the Bahamas seem to be the offshore financial centres that attract most registrations of hedge funds.

[6] Sources: ECB (2004), IMF (2004), Donaldson (2003) and – as regards hedge fund activities in the Nordic countries – Eidolf (2004).

[7] For comparison, the value of the total global volume of shares and bonds is estimated to be more than USD 83,000 billion at end-2003. Source: IMF (2004).

[8] The hedge fund Long-Term Capital Management (LTCM) experienced difficulties in the autumn of 1998.The potential negative effects on the financial markets of forced liquidation caused the Federal Reserve to actively call for a solution, after which LTCM was taken over by other private financial enterprises.

[9] It is often problematic to apply traditional risk measures directly to investments in hedge funds, so that comparisons with traditional investments in e.g. shares and bonds should be interpreted with caution. One reason is that yield profiles for hedge funds may follow other distributions than those traditionally used for calculation of risk-adjusted yields.Another problem is that the data available about the yields of hedge funds could be biased.Funds with very high yields may have an incentive to "keep a low profile" if the investors want discretion.Funds with very low yields have an incentive not to report if they are concerned about potential new investors. Moreover, data from hedge funds that close due to unsuccessful investments is not included. Finally, some hedge funds differ from more traditional investments in that the manager need not mange the capital in periods when there are not deemed to be sufficiently attractive placement options within the strategy chosen by the hedge fund in question. In such cases the contributions are simply returned to the investors until the manager again sees investment opportunities.

[10] According to Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2004, high net worth individuals (defined as individuals with financial assets exceeding USD 1 million) at end-2003 had total assets of around USD 28,800 billion, and this is expected to continue to rise by around 7 per cent up to 2008.

[11] An example of a stabilising effect: when an index rises, index trackers, i.e. investors that benchmark themselves in relation to the index, are increasingly exposed in the index, and particularly in the securities that rise the most. Hedge funds aiming to achieve absolute yields (i.e. not relative yields) will leave the index as it rises (basically, they do not want to change their exposure in the index). The opposite is the case when the index falls.

[12] It is estimated that for some prime brokers income from prime brokerage makes up 25-40 per cent of the total revenue from trading and fees. Source: ECB (2004).

[13] This was the case when Long-Term Capital Management experienced difficulties, cf. an earlier footnote.

[14]This also depends on whether the markets offer sufficient business opportunities for large hedge funds.

[15] ... or are subject to supervision in offshore financial centres.

[16] The other two members were John Snow (Secretary of the Treasury) and James Newsome (Chairman of the Commodity Futures Trading Commission)

[17] Bank of England (2004:2).

[18] Or in a country with which the EU has concluded an agreement in the financial area.
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