Canadian Hedge Funds Should Be Regulated, Group Says

Date: Wednesday, October 4, 2006
Author: Doug Alexander, Bloomberg.com

(Bloomberg) -- Hedge funds in Canada should be regulated the same way as mutual funds to protect individual investors unfamiliar with their risks, says a task force that reviewed Canadian securities legislation.

Hedge funds should be required to disclose all fees, investment strategies, and details on how the fund is valued, said the 12-member group established by the Investment Dealers Association of Canada, the self-regulator for the securities industry.

``Just as a mutual fund regulatory framework for the retail market was established so too should a retail hedge fund regulatory framework be established,'' the group said in a 261- page report released today. ``Retail investors need to be able to access all of the information necessary to make informed investment decisions regarding hedge funds.''

The push to regulate hedge funds is among 65 recommendations proposed by the group to modernize Canadian securities rules. Other suggestions included calls for better enforcement and policing, paperless financial disclosures, an Internet Web-browser system for company filings, establishment of a national court solely for securities offences, and creation of ``senior independent review officers'' to oversee criminal investigations.

The collapse last year of Norshield Asset Management (Canada) Ltd. and Portus Alternative Asset Management Inc. prompted the task force to scrutinize hedge funds. Last month, U.S. hedge-fund manager Amaranth Advisors LLC lost about $6.5 billion after its Calgary-based trader Brian Hunter made wrong- way bets on natural gas prices.

Emerging Products

``Hedge funds attract our attention because they are relatively new, emerging products and any serious attempt to 'modernize' Canadian securities legislation requires an examination of what is new in the capital markets,'' the report said.

The report said hedge funds shouldn't be limited to wealthy investors, although it said the funds should offer more information for consumers, including any potential conflicts of interest between the fund manager, adviser and prime broker.

``We take the view that the pool of investors permitted to invest in hedge funds should be as large as possible,'' task force member Colleen Moorehead said today in a press conference. ``We also take the view that investors should make such investment choices within a regulatory framework that promotes transparency, investor protection, sound management and good governance.''

Loose Regulations

The proposals would allow smaller investors to participate in an industry that is currently ``loosely regulated'' and excludes all but the wealthiest investors, Moorehead said.

Regulating hedge funds sold to consumers is ``a good idea'' that could be difficult to implement, said James McGovern, chairman of the Alternative Investment Management Association in Canada, a group representing Canadian hedge funds.

``Product providers may or may not be interested in even doing this,'' McGovern said in a telephone interview. ``There are a lot of hedge funds that have no interest in being in the retail market at all.''

The task force was led by Thomas Allen, chairman of Westwind Capital Corp., an investment bank. Allen said he expects the findings will be well received by regulators across Canada.

Focused

``I don't think that this report will experience the same 10-year gestation period that other reports have had,'' Allen said in an interview. ``Everybody in each regulator that we've talked to is focusing on enforcement, focusing on investor education, focusing on hedge funds. We don't think that we've identified some new issue that the rest of the market isn't aware of.''

Canada's hedge fund market in 2004 was estimated to include C$26.6 billion in assets under management, of which C$10.9 billion was invested by Canadian pension plans, C$14.1 billion by investors and the rest by foreign clients of Canadian hedge- fund managers, according to the report.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net