Hedge funds worry emerging market regulators

Date: Friday, April 13, 2007
Author: Moneycontrol.com

At the 32nd annual meeting of the International Organization of Securities Commissions in Mumbai, one constant theme is hedge funds regulations. Emerging market regulators are worried that hedge funds may once again exit suddenly, and force a replay of the 1997 Asian crisis reports CNBC-TV18.

When stock market regulators of countries like Thailand, Malaysia, Indonesia and India meet, exchanging notes on hedge funds will be natural. Natural because, the popular belief is that the Asian crisis of 1997 was caused by hedge funds suddenly rushing out, and natural also because once again all these countries are flooded with a surfeit of FII flows.

How to regulate and monitor hedge funds was hence a dominant theme at the 32nd meet of the IOSCO in Mumbai this week. Developed market regulators say they keep track of the systemic impact of hedge funds by regulating the loans they borrow from banks

"We look at the broader impact of Hedge fund trading on the broader financial system we do that by looking at lending to hedge funds done by investment banks and prime brokerages who provide funding for the leveraged investment as their aggregate investment can be significant and they have a significant impact in terms of trading" says Dan Walters FSA, UK

But can Emerging markets like India take the same approach?

Experts estimate that 30% of the foreign flows in the stock markets are through Participatory notes and hedge funds. So how do emerging markets protect themselves from sudden exits of hedge funds? Regulators say that emerging markets need to deepen their domestic institutional base

"Risk of capital moving out is there when there is no solid institution domestic base where there is no long term investors like you have in the US or UK you have pension funds insurance companies who invest in the market" feels Peter Douglas Asia Head, AIMA

SEBI chief M Damodaran echoed this need for depth in the markets before hedge funds are allowed. "The problem is not with hedge funds but the lack of depth in these markets" adds M Damodaran, Chairman, SEBI.