US tightens hedge funds regulations

At present close 25 to 30 per cent of total FIIs inflows come through hedge funds. ‘‘As long as hedge funds are identifying themselves… there should not be any problem about hedge funds’ investments in India,’’ says Motilal Oswal, Chairman of Motilal Oswal Securities.

After a long delay, SEC last week voted 3-2 in support of the new requirements, which will take effect in February 2006 and apply to hedge fund advisers managing $30 million or more in assets. Registration will require hedge funds to designate a chief compliance officer, adopt a written code of ethics and supply audited annual financial reports to SEC and investors.

The new regulations might compel some professionals to leave the industry in the US and discourage others from entering hedge funds. Hedge funds were not heavily regulated as other asset management sectors as they tend to target sophisticated and high net-worth individuals in the US.

Many leading global hedge funds are active in India. ‘‘Nearly 20-30 per cent of the FII investment is brought in by hedge funds. They invest and pull out funds quickly. If the US regulates hedge funds, money flow to these funds may slow down. This in turn will affect fund flow to emerging markets like India,’’ said an analyst with a foreign broking firm.

Hedge fund investment has remained a secret in India. When quizzed by Sebi on the identity of investors, FIIs refused to divulge details.

In a note to the Finance Ministry last year, Sebi said ‘‘many of these entities were not willing to part with details because of confidentiality clause it has with the investors. The top executives of these entities were called by Sebi and were impressed upon the regulator’s need to have the additional information about the ultimate investors in these instruments’’.

Sebi was mulling over introducing specific provisions to regulate these funds. While most hedge funds can meet the requirements of the sub-accounts of registered FIIs, Sebi currently withholds consideration of applications where it is specified that the sub-account is a hedge fund.

A Sebi report said at least 20 per cent of the fund corpus should be contributed by investors such as pension funds, university funds, charitable trusts or societies, endowments, banks and insurance companies. The presence of institutional investors in the fund is expected to ensure better governance by of the fund manager and fund administrators.

The regulator had specified that the investment advisor to hedge funds should be regulated under the provisions of the Indian law or the fund should be registered under the Collective Investment Fund Regulations or Investment Companies Act.

The fund should also be qualified as broad-based, as per Sebi’s FII regulation. The report suggested that the fund manager or investment advisor must have an experience of at least three years in managing funds.