Retail participation in hedge funds a worry says Securities head

The increasing retail participation in hedge funds either directly or through pensions funds, is worrying sharemarket regulators around the world, says Jane Diplock, the chairwoman of New Zealand's Securities Commission.

Ms Diplock, who also chairs the executive committee of the International Organisation of Securities Commission (IOSCO), told a conference in Mumbai that regulators around the world were trying different ways to regulate the fast-changing hedge fund industry and bring in more transparency.

"Hedge funds" are investment funds that use securities, instruments, or futures contracts to try to reduce market risk, such as when an option fund uses futures contracts on stock market indices and short sales with stock options to limit risks. But selling short - the sale of securities a fund does not own to capture an expected drop in in the price of that security -- can carry its own risks for investors.

Ms Diplock said about 8000 hedge funds handled US$1 trillion worth of assets across the globe, but a key problem was their "opaqueness", The Hindu newspaper reported. She said that though in the United States the regulators had made it mandatory for hedge funds to register themselves with the Securities Exchange Commission, this did not guarantee transparency.

Another commentator in The Hindu said many hedge funds were structured as partnerships, often registered in offshore havens such as Cayman Island, and the Mauritius, and barely regulated.

With the bursting of "stock bubble" in ordinary sharemarkets, and relatively low interest rates offered by bank deposits and government bonds, individual and institutional investors, such as pension plans, endowments and foundations, had been moving to higher-risk investments offered by hedge funds.

Some of the alternative investments sought by hedge funds comprised a menagerie of products such as private equity, risk arbitrage, emerging equities and arcane strategies played through credit derivatives (CD). financial instruments to transfer credit risk from one party to another. But The Hindu reported that mechanisms such as CD swaps (CDS), -- which were sometimes bundled up as collateralised debt obligations (CDO) -- had been described by The Economist newspaper as "toxic wastes".

Ms Diplock said IOSCO was in talks with hedge funds across the world to ascertain a better risk profile, but " plain vanilla regulations" would not be a sufficient solution.

Regulators would have to evolve constantly in dealing with this sector, which was also changing fast, she said.

Another challenge to regulators around the world was the possible creation of mega stock exchanges, through cross-border mergers or takeovers of the bourses.

Ms Diplock said all the participants of the stock market including issuers, investors, bankers, stock exchanges, auditors and regulators, had a significant role to play to ensure that the integrity of the market is maintained.

She called for better co-ordination and multilateral cooperation to facilitate better regulation in cases where cross-border information was required.

- NZPA