The Hindu Business Line : `Hedge funds: Direct or indirect regulation need of the hour'

Mumbai April 13 Hedge funds needed to be regulated, directly or indirectly. This has been the general view of financial institutions, supervisors and the public, said Mr Michel Prada, Chairperson, Technical Committee of International Organizations of Securities Commissions (IOSCO).

Speaking at a press conference after the concluding session of the four-day IOSCO annual conference in Mumbai, Mr Prada said, "Today a combination of direct and indirect regulations of hedge funds was required." Mr Prada said when hedge funds are sold to the public they should be directly regulated to prevent risks.

If only professional investors are involved, indirect regulation is the name of the game.

"There is no one unique way forward," he added.

IOSCO has not taken a stand on the issue and Mr Prada said, "People believe they should be regulated."

Mr Prada said hedge funds should not be demonised as they brought efficiency and liquidity to the markets. But it was necessary to understand what they did and their strategies. He added, "Recently, we saw hedge funds face difficulties or debacles without any significant impact on the market.

Regulators have to be careful and see whether hedge fund managers have the tools to manage the funds properly."

Valuation

In relation to hedge funds, IOSCO is debating two issues initially. "These involve valuation of hedge funds and research on funds of hedge funds," said Mr Prada.

Regarding valuation of hedge funds, IOSCO members said a set of principles were required to ensure appropriate valuation of a hedge fund's financial instruments and, in particular, not distorted to the disadvantage of fund investors.

As funds of hedge funds have become the common vehicle in some markets to promote retail investment in alternative assets on a domestic as well as a cross-border basis, the IOSCO initiative will clarify potential issues of concern.

IOSCO has evolved a Code of Conduct for Credit Rating Agencies (CRAs) as companies had not performed well in spite of getting positive reviews from credit rating agencies. The IOSCO found "room for improvement."

Mr Prada said there was a taskforce, which will undertake a new mandate on the role of CRAs in development of structured finance products.

"The way in which rating of structured finance products was done is very different from corporate bonds.

These products involve a significant part of the companies' turnover and there may be a conflict of interest," said Mr Prada.

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