'Hedge funds can't be checked, can have broad restrictions'

Mumbai, Jan 16: Hedge funds, which are a regulator's nightmare due to their practice of profiting from declining stock prices, cannot be checked but broad restrictions are possible, a financial expert said today.

"There is no way one can bring regulation for hedge funds but you can have macro type of restrictions," New York varsity finance and economics professor Marti G Subrahmanyam said at FICCI's Annual Capital Market Conference.

Market regulator SEBI too is on vigil and is planning a special session on hedge funds as a regulatory challenge during the forthcoming IOSCO Summit of global stock market regulators in Mumbai in April.

"How can we check liquidity, its the cost of being part of the global market, while it is a futile exercise tracing the root of the money," Subrahmanyam said during a special address.

Hedge funds are pooled investment vehicles and their investment in public traded securities at a time is huge as compared to average investors.

In the US, hedge funds are registered but not regulated by any of the US market regulators like Securities Exchange Commission (SEC).

Hedge funds, which are widely perceived to destabilise equity markets, also have moderating effect on volatility by pumping tremendous amount of liquidity, said Subrahmanyam, dispelling several other myths about fly-by-night operators. When asked whether hedge funds had raised volatility in the US market, Subrahmanyam said on the contrary "hedge funds made tremendous liquidity available, which smoothened out volatility in the market, and US market's benchmark index S&P 500 that experienced volatility of 16-25 per cent earlier was showing a volatility of only 10-11 per cent now." On another myth of very high returns cornered by these fly-by-night operators as they moved from one market to another, Subrahmanyam said: "In 2005, the average hedge funds had under-performed the market and that 40 per cent return by such funds was a myth.

"Average hedge fund's return was in the proximity of 11 per cent and many bad hedge funds were on their way out," he said.

They were significantly raising trade volumes in the US equity market, he said when asked whether they contributed to equity markets.

Hedge funds were currently managing almost 1.5 trillion US dollars (1,500 billion) of assets globally, which had doubled in three years with capital mainly concentrated in top 200 funds out of about 10,000 funds in operation.