Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 32)

Hedge Fund Regulation more moderate, Soros-like approach toward regulation. That’s especially true in Australia, Hong Kong and Singapore, where the authorities have taken steps to make it easier and cheaper for hedge funds to operate, such as streamlining licensing and limiting taxes. Even Japan, where regulators in the past have been openly hostile toward hedge funds, may be starting to loosen up. To be sure, Asia has its hardliners, including South Korea and Indonesia, which like their Western counterparts put a clamp on short-selling this fall. The relatively moderate views toward hedge fund regulation across much of Asia reﬂect in part the fact that the region has been far less hurt by the credit crisis than the U.S. and Europe. Although the rest of the world has fallen into a painful and potentially protracted recession, most Asian countries continue to see economic growth. The World Bank forecasts that China will increase its gross domestic product by 7.5 percent in 2009, down from the estimated 9.4 percent rise in 2008, because of lower demand for its exports. Although the bank is predicting slowdowns for other Asian countries — India is expected to see GDP growth slide from 6.3 percent to 5.8 percent and Indonesia from 6 percent to 4.4 percent — the overall economic environment is rosier than in the West, as the world’s industrial center of gravity continues to shift eastward. Still, like their peers in Europe and the U.S., most AsiaPaciﬁc hedge funds struggled in 2008. The Eurekahedge Asia hedge fund index was down 21.6 percent for the year through November (most Asian equity indexes were down subject to regulatory review.” Value Partners had $3.1 billion in assets under management at the end of October, down from $5.9 billion in the spring. Christophe Lee, CEO of SHK Fund Management, believes that Cheah’s concerns are overblown — at least when it comes to Hong Kong. Lee, whose $800 million hedge fund ﬁrm is based there, points out that the Chinese territory did not follow the lead of the U.S. and the U.K. this fall when they banned short sales in the shares of ﬁnancial services companies. “Just when the whole world is speaking out on regulations, the outlook is that there will not be that much direct action in Hong Kong,” he says. Secretary for Financial Services and the Treasury K.C. Chan and other ofﬁcials have been actively promoting Hong Kong as Asia’s hedge fund hub. Speaking at a conference a year ago, Chan trumpeted rule changes enacted by the territory’s Securities and Futures Commission that enable ﬁrms already registered as investment advisers in the U.K., the U.S. or other well-regulated countries to obtain a license to operate in Hong Kong within a few weeks. Offshore funds in Hong Kong are also exempt from proﬁt taxes, which were reduced from 17.5 percent to 16.5 percent this year. “We will continue to review our regulatory model to ensure that it will not hamper ﬁnancial innovation nor stiﬂe further development of Hong Kong’s ﬁnancial services industry,” Chan said at a luncheon in Washington late last spring. Japan has been a notoriously difﬁcult place for hedge funds to operate. Obtaining a discretionary fund management license there can take years, and on the surface the ofﬁcial stance is as tough as ever. Shoichi Nakagawa, who serves concurrently as Finance minister and as head of the Financial Services Agency, didn’t give an inch during a press conference in Tokyo on November 21: “[There is] no question of relaxing the regulations on hedge funds.” Yet senior ofﬁcials at the FSA, working under Nakagawa, caution that Japan has “no concrete plans” to expand registration and reporting requirements for investment fund managers, as some international Tokyo-based lawyers, such as Christopher Wells of White & Case, believe will happen in Japan and elsewhere. Kenichi Watanabe, president and CEO of investment banking giant Nomura Holdings, for one, is betting that Japan will, if anything, ease the rules (see box, right). In October, Nomura bought Lehman Brothers Holdings’ Asia-Pacific operation out of bankruptcy. Lehman had been a leading prime brokerage in Japan, with a huge amount of hedge fund business on its books. Most countries in Asia have made huge strides since the ﬁnancial crisis a decade ago by building up free-market institutions, strengthening foreign exchange controls and training qualified financial officers. Yet there is at least one nation that still seems prone to chaos and confusion — South Korea. Its currency, the won, plummeted from about 1,000 to the dollar in early August to a historical low of 1,500 to the dollar in November. Short-term funds are cascading out of the country, including money from hedge “A lot of the hedge fund regulation story will take a lot longer to play out.” — PETER DOUGLAS, PRINCIPAL AND FOUNDER, GFIA at least twice that). Peter Douglas, founder and principal of GFIA, a Singapore-based consulting and hedge fund research ﬁrm, estimates that the combination of redemptions by disappointed investors and falling share prices may cut by as much as 50 percent the value of Asian hedge fund assets under management, which peaked at $250 billion last spring. He says that about 80 of the estimated 1,000 funds in Asia had closed by the end of October and predicts that substantially more will do so by year-end. Cheah Cheng Hye, chairman and CIO of Hong Kong– based Value Partners, one of the biggest hedge fund ﬁrms in Asia, thinks the industry should be prepared for regulatory changes and challenges. “Politicians and regulators are under huge public pressure to put tighter control over ﬁnancial services providers, especially hedge fund managers,” Cheah says. “Many current practices of hedge funds, such as adoption of side pockets and valuation of illiquid investments, will be 32 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2008/JANUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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