US - President Barack Obama's sweeping reforms to the banking industry proposed yesterday were generally welcomed by global asset management figures, but some warned they may cause short-term losses for pension funds, large holders of US bank shares.
In a briefing made at the White House, Obama brought forward additional measures to the financial reform package already moving through Congress.
He said his economic team will work with Congress to "ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit".
Principal Global Investors Europe chief executive Nicholas Lyster said no or reduced proprietary trading would result in more transparency, but there could be negative impacts on the short term.
He said: "Liquidity can be affected and earning of banks could fall, therefore pension funds can be affected as they are big owners of banks." He expects if this happen, earnings will eventually stabilise, making the impact short-lived.
The Alternative Investment Management Association (AIMA) agreed. AIMA chief executive Andrew Baker said: "Although the proposals could create welcome opportunities for the global hedge fund industry we are concerned about the possibility of liquidity in markets being reduced and the prime broker relationship being adversely affected."
Other experts said pension funds all over the world will be unavoidably affected if those reforms are brought forward.
American Century Investments vice president Peter Brackett said: "The reforms come at a time when investors like pension funds are looking for holistic solutions. For instance, a pension fund having a derivative overlay that incorporates a number of alpha sources will need to go to a bank for the swaps, to hedge funds and other providers for the alpha, to long only fund, and so forth. Therefore, I believe this is going to play interestingly for the asset management industry."
Research company Preqin warned the reforms could have a very significant impact on both the hedge funds and private equity industries.
Preqin spokesman Tim Friedman said: "The potential disruption that such widespread reform could bring to the alternatives industry could affect hundreds of banking institutions in the US.
"Furthermore, there would be a knock-on effect for the hundreds of investors in funds and funds of funds managed by these firms."
Capital Dynamics did not share this view. Capital Dynamics managing director John Gripton said: "Private equity funds, in the UK and in Europe, but also in the US, are largely independent and we favor those types of funds. Therefore, from our perspective it would not be much of a change. But I would assume that if these reforms are brought forward, those captive funds ¬- funds owned by banks - will spin out and become independent. This will make the decision to invest in them easier than it is at the moment."
Gripton said although those private equity funds would continue to do business, they might experience more difficulties raising money as there is a lot of overlap between the banks' general clients and the investors in the captive funds.
But, he added: "I think that for pension funds the opportunities will remain the same, other than the fact that it would be cleaner from the due diligence point of view as there will be less conflict of interest."
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