Regulators across the globe have been tearing their hair out over how best to approach hedge fund regulation. The US Securities and Exchange Commission last year tried - and failed - to force hedge fund advisers to register for supervision, before opting for a more softly-softly approach. The European Central Bank, meanwhile, has pointed to the hedge fund sector as a major risk to global financial stability, proposing a central register of positions held by funds.
Regulators and central banks, however, could do worse than take a long, hard look at South Africa. The country's hedge fund industry has grown rapidly in a relatively short period of time - there are around 120 hedge funds currently in existence, with assets under management more than doubling to approximately R18 billion ($2.5 billion) in the 12 months to June 2006. But, despite its breakneck growth, the industry has maintained high levels of transparency, risk management and compliance.
Many participants in South Africa's hedge fund market come from traditional asset management backgrounds. As such, the need for transparency is accepted as a given. Virtually all hedge funds use independent administrators, while many supply portfolio information to specialist risk consultancy firms, which provide risk and performance measures to the funds and publish risk reports for investors.
Hedge fund legislation is on the cards in South Africa - but it is expected that it will focus on tax and structural issues rather than stipulating disclosure and compliance requirements.
Of course, the country's hedge fund industry is pretty young. So far, fund managers have been able to post healthy returns, clinging to the coat-tails of a bull run in South African equities. When the first major blow-up occurs, the laissez-faire approach taken by the country's regulators could quickly change. At the moment, however, South Africa can be held up as a model of self-regulation.Editor Nick Sawyer.