Challenges arising from alternative investment management

F. Haas, Noel Amenc and M. Vaissié

Financial Stability Review, 2003, issue 3, 100-121

Abstract: Alternative investment management differs from traditional asset management in a number of respects. First, it is distinct in terms of both its targets – aiming to achieve an absolute performance, regardless of trends in underlying markets – and its strategies, in particular exploiting inefficiencies in the valuation of financial assets via opportunistic and discretionary positions. It also differs in terms of the financial techniques implemented, e.g. the extensive use made of leverage, derivatives and short selling, and the specific investment vehicles used (ad hoc structures such as hedge funds that are not bound by ordinary law in the way traditional investment vehicles are). These particularities, alongside the fact that the alternative investment universe is somewhat opaque, make it difficult to measure a fund’s risks or a fund manager’s performance. Specific measurement tools are therefore required, which differ from those commonly used in traditional asset management. Over the past few years, the alternative investment management, a diverse and rapidly-evolving universe, has enjoyed a spectacular development, which is illustrated by the sharp rise in the amounts under management and the proliferation of investment vehicles offered to an increasingly broad investor base. In view of the specific nature of alternative fund managers’ modus operandi, the flourishing of the alternative investment industry raises questions as to its implications in terms of financial stability. It also raises new issues regarding the division of roles between market participants and supervisory authorities in the organisation and monitoring of this asset management sector.

Date: 2003
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