The Hindu Business Line : `Hedge funds need not be feared'

Mumbai April 12 An average Indian's perception of hedge funds is that they are mysterious unregulated perpetrators of markets volatility. Mr Martin Wheatley, CEO, SFC Hong Kong, summarised this prejudiced view well when he said that attributing market volatility to hedge funds is similar to the fattest man being asked to leave the elevator when it gets overloaded.

The other panel members in the discussion on the New Regulatory Challenges being posed by Hedge Funds at the International Organization of Securities Commissions (IOSCO) 2007 concurred with this view. Mr Alain Reinhold, Executive Vice-President of ADI summed the case for hedge funds by saying that 0.02 per cent of hedge funds are wound up, are mostly regulated entities, they help in price discovery, provide liquidity to the markets and can be used to hedge market volatility since their correlation with the market indices is insignificant.

With $1.5 trillion in assets worldwide, hedge funds cannot be ignored by any exchange. Many of the markets in the developed countries are allowing even retailing of hedge funds. The hedge funds have gained respectability of late since a number of pension funds and other institutional investors are investing in these avenues of alternative investment in order to diversify their portfolios.

Valuation concerns

The major regulatory concern with hedge funds is the valuation of their assets. Since the managers use sophisticated investment strategies that include investment in illiquid assets, determining and disclosure of the fair value of the assets was cited as the prime area of concern by the panel.

The unanimous recommendation to overcome this hurdle was by using independent valuation experts to value hedge fund portfolios. Though the risks from hedge funds are being blown out of proportion in India, other countries do not even see the need to regulate the hedge fund money flowing in.

A member of the Financial Services Board, the regulatory authority of South Africa, said that though hedge funds are operating in the Johannesburg Stock Exchange by investing through insurance companies in South Africa, they do not see any potential threat from hedge funds and see no need to regulate them.

A similar opinion was voiced by a member of the Thailand regulatory board. They do not differentiate between hedge funds and the other Foreign Institutional Investors investing in the country.

SEBI moves

SEBI has made the right moves to invite hedge funds to directly register in India. The criteria laid down by SEBI for registering as hedge funds include that the investment advisor should be regulated under the relevant Investment Advisor Act or Investment Companies Act and that at least 20 per cent of the corpus should be contributed by investors such as pension funds, charitable trusts or societies, university funds etc.

On being asked if SEBI was willing to relax the guidelines to facilitate direct entry of hedge funds within India, Mr G. Anantharaman, full time member of SEBI, said that they are looking into it.

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