Regulatory initiatives in the arena of position reporting strike me as misguided. Position reporting is at best an unrealistic proposition. At worst, it could undermine the integrity of financial markets. It is unrealistic because the timeliness and aggregation problems are virtually insurmountable in an industry which today represents nearly 25% of the total mutual funds industry in the United States. More importantly, it is potentially counterproductive because, amongst other things, position leaks could encourage behavior by market participants which is fundamentally incompatible with a market-based price finding mechanism. The most complex potential regulatory arena concerns leverage in the hedge fund industry. Extreme levels of leverage are an obvious source of concern for central banks in light of the credit risk nexus between hedge funds and the global banking system. This credit risk nexus could become particularly precarious if a large scale credit crisis were to coincide with a global capital market liquidity crisis. Regulatory initiatives directed at assessing the degree of leverage in the hedge fund industry should therefore not be dismissed ex ante. 7  4  I.e. the value of the positions as a multiple of the equity value. BIS Review 8/2005  Nonetheless, meaningful efforts to measure leverage in the hedge fund industry are bound to be undermined by complex aggregation problems not dissimilar to those prevalent in the arena of position reporting. Misguided regulatory initiatives will fail to accomplish what they set out to do and thus undermine the credibility of regulation. Ineffective regulation can ultimately undermine the competitiveness of financial centers.

This is high compared with the 0.2 achieved by equities and the 0.5 achieved by US bonds since 1994. Admittedly, such aggregate return data need to be interpreted carefully.6 Nonetheless, the available industry databases are useful in identifying broad trends within the hedge fund industry. Hedge funds and market volatility Throughout the last twenty years, it has become conventional wisdom to associate hedge funds with extreme market volatility. The premise is that hedge funds push market prices temporarily away from their equilibrium, either in the short- or the medium-term. The traditional counter-argument sees hedge funds fundamentally as stabilizing market participants who identify arbitrage opportunities, take profits as these inefficiencies get eliminated and provide the market with liquidity. A survey of available analytical work suggests it is difficult to conclude that hedge funds decisively and adversely affect market volatility. This raises the question of whether direct observation of market price action can provide us with additional clues. One area worth examining is the macro and the managed futures segment of the hedge fund industry where recent inflows have been substantial. A number of markets that hedge funds in these strategies are typically engaged in have recently become more liquid as demonstrated, for example, by the increase in turnover and rise in non-commercial positions in the gold and oil futures markets (graphs 3 & 4). Market observations also suggest that many technically driven hedge funds appear to hold similar positions on the basis of trading systems, driven by related trigger points.