Regulation of Hedge Funds (2/3)

SFC may feel proud of Hong Kong becoming a leading hub for hedge funds in the Asian region. The survey report indicated that HK has achieved a high growth of hedge funds, managers and AUM over the past 2 years.

Details of the survey are not reproduced here. I just want to highlight the following findings:

• 74% of responends reported that they had 10 or less staff. It could be envisaged that they may not have a full time compliance officer. Quite probably one staff is required to oversee risk management, compliance and operations.
• Most of the hedge funds are offered only to institutional investors. This is normal as most of retail investors and even salespersons could not understand hedge funds well. However, I also wonder whether institutional investors like pensions could master hedge funds.
• While the textbook tells us there are so many alternative strategies adopted by hedge funds, the strategies used by HK hedge fund managers are occupied by equities long/short (34%), multi-strategies (25%) and FoHFs (20%). Only a very small portion is playing more fantastic strategies like global marco, event driven, distressed debts, etc.
• A majority of hedge funds used no or little leverage. This is because they mainly invested in equity markets and did not trade heavily in derivatives.

In HK, direct regulaton of hedge funds is not practical because most of them are unauthorized private funds. SFC can only indirectly supervise the licensed hedge fund managers. It seems that the hedge funds managed by HK managers are still far from sophisticated as the overseas ones. Therefore the corresponding compliance concerns are still limited to those basic topics such as internal controls and conflicts of interest.

Next Monday I will touch on the international arena of hedge funds.