Sandra Rigot

The regulation of hedge funds under the prism of the financial crisis: policy implications

This paper deals with two issues. On the one hand, it shows that structural changes in financial markets and in the hedge funds industry make the “light-touch” arguments for regulating hedge funds no longer relevant. On the other hand, pleas for stronger regulation of hedge funds are getting more attention. In the first part of the paper the huge expansion of the industry is outlined and the state of current regulation is highlighted. In the second part an in-depth analysis of risks associated with hedge funds is carried out. It is shown that systemic risk can arise from leverage and from concentration of exposures amongst hedge funds. The part played by hedge funds in the spread of the crisis of structured credit is portrayed. In the third section, the recommendations of professional organisations, regulatory authorities and international institutions are summed up within the framework of risk mapping. This oversight shows the ways to reform: the need for direct regulation, the enhancement of indirect regulation and the overhaul of securitization. The prospective pattern of regulation encompasses macro- and micro-issues, and impinges upon factors of demand and supply. It emphasizes the enhanced role of public regulators and displays the conditions for an effective market discipline performed by long run institutional investors. JEL Classification – G23.

The Determinants of Pension Funds’ Allocation to Private Equity

This paper investigates the main determinants of pension funds investment in private equity funds, and particularly in venture capital and leverage buyouts in the US and Canada over the 1996-2011 period. Our results, based on a Tobit model, show some important differences between pension funds allocating to private equity and more traditional assets (i.e. equity). The first ones are bigger, mainly diversified private funds. They do not consider the age of their members when deciding this type of allocation and they present a higher discount rate. Furthermore, they specially take into account their private equity returns in comparison to management costs. We also show that pension funds investing in private equity do not distinguish between venture capital and leverage buyouts.

Potential Impediments to Long-Term and Low-Carbon Investment: The International Accounting Standards at Stake

This paper[i] aim to understand the role of today’s accounting requirements for financial intermediaries (banks and insurers), to be aware of their limitations and to underscore the need for reform in order to foster long-term and then low-carbon capital spending in Europe. The paper shows that International Financial Reporting Standards (IFRS) can affect long-term asset allocation of banks and insurance companies. International accounting standards do not differentiate between low and carbon intensive investment and do not take into account climate risks beforehand. To tackle these issues, we make some recommendations to promote long term and low-carbon investment. [i] This paper was elaborated as part of a partnership with the French Accounting Standards Setter (Autorite des Normes Comptables, ANC), the Foundation for the research of the Caisse des Depots (CDC) and BNP Paribas between June 2013 and December 2015.

Does Regulation Matter? Riskiness and Procyclicality of Pension Asset Allocation

In this paper, we investigate the relative importance of drivers to pension funds’ asset allocation choices. We specifically test if the contrast between regulatory approaches of public and private Defined Benefits (DB) pension funds in the US, Canada and the Netherlands have an impact on the riskiness and procyclicality of their asset allocation. Derived from panel data analysis of a unique database comprising of more than 800 pension funds’ detailed asset allocations, our results underscore the economic importance of regulation in the funds’ asset allocation choices, relative to institutional and individual funds’ characteristics. In particular, quantitative risk-based capital requirements, and to a lesser extent valuation and funding requirements (i.e., the choice of the liability discount rate) or the presence of quantitative investment restrictions, induce pension funds to significantly decrease their asset allocation to risky assets, especially to equities. Allocation to alternatives, which are comparatively treated quite favorably by solvency standards, is higher in the presence of risk-based capital requirements. Contrary to popular conviction that regulatory mechanisms encourage procyclical asset allocation, we find that funds subject to risk-based capital requirements were likely to be less procyclical during the last crisis – an outcome possibly tempered by temporary regulatory slackening in response to the crisis.