Yam `Not Happy' With Transparency of Hedge Funds

Date: Monday, September 24, 2007
Author: Chia-Peck Wong and Bei Hu, Bloomberg.com

Hong Kong Monetary Authority Chairman Joseph Yam said he's displeased with the low level of disclosure by hedge funds compared with other investors.

``I have not been happy with the asymmetry in transparency,'' Yam said after a speech at a forum in Hong Kong today. ``It makes it very difficult for regulators to do a proper job. We are sometimes sweating and being very concerned. It's something that needs global efforts to address.''

Tightening rules in Hong Kong alone would risk pushing hedge fund operators into other Asian markets. The funds managed $33.5 billion of assets in the city in March 2006, a 268 percent increase over two years, according to a survey released by the Hong Kong Securities and Futures Authority last October.

The pace of growth in parts of Asia exceeds the industry's global average. Hedge fund assets worldwide almost tripled in the past five years to $1.75 trillion as of June, according to Chicago-based Hedge Fund Research Inc., as stock markets rebounded from a two-year slump and commodities soared.

In two years to June 2006, assets almost tripled in Australia, home to Asia's largest hedge fund industry. In the 12 months to July, assets in Singapore more than doubled.

Direct regulation of hedge funds in Hong Kong is impractical, ``if not impossible,'' the SFC said in the October document, noting that many are based overseas, complicating supervision. Of Hong Kong's 20 largest by assets at the end of March last year, 13 were offshoots of hedge fund managers in the U.S., U.K. and Japan, the SFC survey found.

Opacity Concerns

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall. They typically charge a 2 percent management fee based on the assets they oversee and an extra 20 percent on any profits.

Yam raised concerns in July that the opacity of hedge funds would prevent early detection of risks by regulators and their counterparties to trades, leading to collapses such as that of Amaranth Advisors LLC.

``With management fees tied to performance, hedge fund managers are more inclined to take risks than to abide by market discipline,'' he said in a commentary posted on the authority's Web site. ``Fierce competition for prime brokerage business is likely to put pressure on institutions to compromise, eventually leading to a relaxation of risk management.''

Big Bets

Amaranth failed last year after losing $6.6 billion on natural-gas bets, about two-thirds of its assets, in a record hedge-fund collapse. In June, a U.S. Senate investigation found Amaranth controlled more than half the U.S. natural gas market in 2006 and evaded regulators trying to restrict its purchases.

Industry organizations including the Alternative Investment Management Association and Managed Funds Association are working on codes and standards for disclosure and governance. Yet more effort is required to persuade fund managers to follow these guidelines, Yam said in the earlier commentary.

Hedge funds have grown rapidly in Asian markets including Singapore, where 190 of them managed more than S$40 billion ($27 billion) of assets in 2006, up 150 percent from a year earlier, the city-state's central bank said in July. The central bank offers tax breaks for funds that set up there.

Australian hedge fund managers directly controlled A$41 billion in assets as of July last year, the most in Asia, according to AsiaHedge. Money has flowed in as a result of compulsory pension savings, tax breaks, a new state-owned investment fund and takeovers, according to government data.

Australia allows individuals to invest in hedge funds, unlike the U.S., where investors must first qualify by having a high net worth. In Australia, hedge fund managers conform to the same regulations as those of managed funds.

To contact the reporter on this story: Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net