Research

After no-doubt considerable soul-searching, Hong Kong's Securities and Futures Commission (SFC) finally published in early May the guidelines which it will follow in determining whether a hedge fund will be authorised for public sale. This determination came eleven months after the Monetary Authority of Singapore (MAS) released its own standards. While there are similarities, the hurdles set by the SFC are much higher.

By far, the most significant difference is the minimum assets required in the management company. While the MAS has no such requirement, the SFC is looking for US$100m in hedge fund strategies. This means that hedge funds which are in greatest need of assets are effectively barred from participating in the Hong Kong retail market. Meanwhile, boutique management companies that can meet this minimum are unlikely to submit applications, due to the higher administrative burden of sourcing and managing retail money.

Who is left? The large multinational firms, that already have hedge fund products and a retail distribution capability, will likely take the Hong Kong hedge fund market. Read that to mean the likes of JF Funds, Man Investment Products, Momentum and Schroders.

At least the SFC has bothered to define what a hedge fund is and detailed what qualities the government will favour in judging applicants. Based on our conversations with hedge fund and fund of hedge fund managers, the Singapore rules do not provide enough direction. Without clarity in how supervision of the hedge fund industry is likely to proceed, there has so far been little appetite to apply for a license. To the best of our knowledge, there have not yet been any hedge funds licensed for public sale in Singapore, a telling sign.

At least the SFC and the MAS have created a regulatory framework within which hedge funds can in theory be sold to the public. Retail investors elsewhere in the region are still waiting for their financial authorities to make a decision, everywhere in the region that is, except Australia.

The Australian Securities & Investments Commission (ASIC) does not distinguish between hedge funds and more conventional investment vehicles. The same set of laws, called the ASIC Act, governs hedge funds and long-only unit trusts, literally meaning that the same hurdles must be cleared before either can be marketed to the public. Australia is in fact among the most liberal environments for marketing hedge funds in the world.

Elsewhere in the region, the painful memory of the Asian financial crisis, when currencies and stock markets collapsed, is probably stifling action. As anybody following Asia at that time will remember, hedge funds were broadly identified by regional governments as the main culprits behind the collapse, even though the unified exodus from regional markets by the long-only community probably played a much greater role. Actively encouraging hedge funds to sell products domestically may simply mean far too much loss of face for the authorities in much of the region.

We have compared some of the hedge fund specific regulations which exist currently in Hong Kong, Singapore and Australia in the following table. Japan is also included as a proxy for where the rest of Asia stands on the issue.