Hong Kong to Permit Hedge Funds
Asia has vivid memories of the effects of the collapse of Long-Term Capital Management and many still blame George Soros for triggering the Asian financial crisis three years ago. But nonetheless, there now seems to be some progress on the rehabilitation of hedge funds.
The Securities and Futures Commission (SFC), Hong Kong's securities regulator, plans to reverse the draconian changes that were put in place during the financial crisis of 1997 to 1998. At the time, the Hong Kong authorities clamped down on the ability of hedge funds to borrow securities and sell them short, hampering their ability to execute even the most basic strategies. It also increased on-the-spot investigations of hedge fund managers, aimed at stopping speculation against the Hong Kong dollar.
Perhaps the most interesting change in a bid to mend fences with Hong Kong's hedge fund community is the move to allow locally registered products. Many believe that like the Italian market, the first product to take off will be funds of hedge funds in early 2002. Hong Kong's SFC has issued a consultation document on offering hedge funds to a wider audience. By the end of this week it hopes to have received all the comments on the proposed guidelines on hedge funds from the public. The guidelines will be incorporated into the code on unit trusts and mutual funds.
Ernest Lau, a spokesman for the Hong Kong Securities and Futures Commission, says that the reason for the consultation document was the increased interest in offering hedge funds to the public in Hong Kong as investors look for alternative investment choices. "The SFC has reviewed the regulatory issues and we believe it is possible to satisfy market demand without compromising investor protection. The SFC is committed to facilitating product innovation and investor access to a wide range of investment choices. In issuing the consultation paper, we are asking for views from different sectors of the market to help us formulate our policy on hedge funds."
The big debate, for which the SFC wants the public's comment, is which of two approaches it should take for the offering of hedge funds to investors. The first is whether hedge funds should only be offered to a specific segment of the public. The "market segmentation approach" can be achieved by using a "net worth" test or by imposing a minimum subscription amount. The other option is to allow hedge funds to be offered to the general public without any restriction.
Lau says: "In both cases there would be strong requirements for disclosure to potential investors of the risks of investment and an obligation for financial advisers to assess whether the investment was suitable for the investors."
Stewart Aldcroft, managing director of Investec Asset Management Asia, is broadly in favour of the SFC's proposals. But he does not believe that either of the proposed alternatives alone would be the best route to market. "There are likely to be many hedge funds that do not wish to gain authorisation from the SFC, that don't wish to have retail clients and that don't wish to provide transparency. The draft guidelines should ignore these types of funds," says Aldcroft in a letter to the SFC.
"We believe it is in the best interests of the development of the hedge fund industry, if the SFC guidelines were to set out clearly the types of funds that can be authorised for public marketing, for them to set out also tiers for minimum investment, dependent on the possible level of risk incurred by the fund, and then allow the market to develop and create funds around these guidelines," he says. …