philipp m hildebrand : developments in the hedge fund industry speech by dr philipp m hildebrand, member of the governing board of the swiss national bank, at the swiss finance conference 2005, zurich, 4 february 2005. * * * ladies and gentlemen, let me begin by thanking the organizers of the finance forum for the opportunity to be on today ’ s outstanding program. it is not often that a swiss central banker gets to speak after a nobel laureate. both the gratification and the risks involved in doing so are self - evident. i will enjoy the former and try to ignore the latter. adding value to the rich debate about hedge funds is a difficult task. it is generally recognized that hedge funds have made an important contribution to the transfer and diversification of risk through innovative asset management skills and techniques. they are a positive force in rendering global financial markets more liquid and therefore more flexible. my comments today will focus on those aspects of the hedge fund industry that strike me as particularly relevant with regard to the need to preserve and enhance liquid financial markets. 1 after some general remarks about hedge funds and the hedge fund industry, i will explore the question of whether hedge funds can materially influence market volatility. i will also refer to one of the key characteristics of hedge funds – the use of leverage – and examine how such leverage might affect overall financial market stability. finally, i will offer some reflections on the regulation of hedge funds. definitions surrounding hedge funds and the hedge fund industry can give rise to confusion. in many ways, the word “ hedge ” has little definitional value. 2 hedge funds are best understood as potentially leveraged private investment vehicles deploying a wide range of largely unconstrained investment strategies with the aim of achieving high absolute rates of return. hedge fund managers typically invest a share of their personal wealth in their own funds in order to align their incentives with the interests of the external investors. hedge funds usually have a dual fee structure. the investor pays an annual management fee of 1 % to 5 %. in addition, most hedge fund managers charge incentive fees on capital gains. these incentive fees vary between 20 % and 50 %. many hedge funds impose investment lock - in periods of anywhere from one to three years. during these lock - in periods, principal and in many cases profits cannot be withdrawn. during the last decade, the hedge fund industry has steadily grown in size. in 1990, there were an estimated 2000 hedge funds managing around usd 40bn. in less

to strike trade and investment agreements with a wide range of countries beyond those covered by virtue of its membership of the eu. but brexit is an example of reculer pour mieux sauter. that ’ s because any reduction in openness with the eu is unlikely to be immediately compensated by new ties of a similar magnitude with other trade partners. and even if new agreements with other partners could be struck instantaneously, the reorientation of business relationships will take some time. this makes brexit, relative to the experience of the past half century, unique. it will be, at least for a period of time, an example of de - globalisation not globalisation. it will proceed rapidly not slowly. its effects will not build by stealth but can be anticipated. let me turn to those effects. the first is the obvious disinflationary impact of brexit given that the eu takes 44 % of uk exports. whatever is negotiated, in terms of both the final arrangements and the transition to them, the most important influence on demand in the short run will be the degree of access to the single market since the uk runs a 1. 5 % trade surplus in services and a 5 % trade deficit in goods. external demand for uk exports will also reflect the extent to which uk firms can maintain their positions in eu - based global supply chains. the proportion of uk exports that are intermediate components of eu value th rd chains has increased from about 1 / 5 of exports in 1995 to about 1 / 3 in 2014 ( chart 13 ). increasingly, literally : stepping back in order to jump better. the ultimate impact of brexit on eu demand for uk exports depends on the extent to which uk access to eu markets resembles being a member of the customs union for goods and the single market, which covers trade in goods and services as well. world input - output database. see also credit suisse, ‘ brexiting the supply chain ’, european economics research 11 august 2016. all speeches are available online at www. bankofengland. co. uk / speeches the uk doesn ’ t so much export to europe as through europe ; it is a supplier of components to final goods that are exported beyond the continent. chart 13 : uk increasingly integrated in onward eu supply chains notes : the chart shows how much of the value added by the uk in exports to the eu / other countries that is subsequently re - exported. sources : credit suisse and world input -