Regulatory fun and games

Regulators have used both a stick and a carrot approach to hedge fund providers and promoters over the past 12 months, and in so doing have twisted global distributors of hedged products in a variety of directions.

In the US, the SEC has announced closer scrutiny of prime brokerage, hedge fund fraud, distribution of hedged products and money laundering via hedge fund portfolios. On 14-15 May, the SEC hosted a two-day round table to discuss its approach to regulation, and the role of hedge funds in the investment landscape.

The two-day talkfest may not have taken place in the most comfortable climate, with Senate Banking Committee chairman, Richard Shelby, barely four weeks earlier having branded hedge funds 'the last frontier, an uncharted area,' probably reinforcing the opinions of those who equate frontiers with hordes of unchecked cowboys.

In the UK the FSA had questioned, then in May rejected, negative influence of short selling by hedge funds, while France's COB and Ireland's Central Bank have both moved toward retail distribution. Hedge fund managers may be feeling the need for compliance officers just to keep pace with all the actual ' and threatened ' regulatory reviews, let alone to ensure their hedge funds are compliant with them.

In Singapore and Hong Kong, while the respective authorities' moves to regulate funds for the retail market have spluttered and stuttered along, a significant development from some providers gives a warning signal to those who run the regulation industry.

It has been reported five hedge fund providers retracted applications to distribute portfolios in Hong Kong to retail investors, citing complex procedures to attain approval, and uncertain demand. This is three more providers than are currently licensed to distribute hedged portfolios to retail investors in Hong Kong.

There is growing evidence portfolio providers ' and particularly some of the smaller shops ' may be flooded with too much regulation. If regulators push for greater transparency of hedge funds, then hedge fund providers deserve to push for greater clarity from those who regulate them.

It is clear regulators worldwide are toying with the idea of retail distribution. However, the hurdles they place in the way of promoters to reach a broader audience could see any eventual widespread go-ahead resemble a party to which nobody comes.

How could regulators bring greater clarity to the murky waters of hedge fund regulation?

By spelling out exactly how, what or whether they plan to regulate hedge funds and their managers. Carrying out endless reviews and threatening to instigate others merely produces 'regulatory fatigue' among managers. Then providing high barriers to be regulated for retail distribution ' as is apparently the case in Hong Kong ' must make providers wonder whether playing the regulation game is at all worth it.

The answer is ' in some jurisdictions it will be, in others definitely not. And true to the laws of global capital, hedge fund products, like money, will flow to the destination most readily able to use them.

David Walker, editor