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The popularity gained overtime and
the ever-increasing crowd of
investors in the Hedge Fund industry
has augmented the need for higher
degree of regulation in the hedge
fund market. Hedge funds are very
similar to mutual funds except that
there are fewer regulations on hedge
funds. As a result hedge funds
require a much larger investment.
Hedge funds are very reticent, that
is, they are private, between
individuals, and do not have to be
made known to the government or
other companies. This allows hedge
funds to be free from the
regulations that mutual funds have
to adhere to. Because of this large
companies move undisclosed amounts
of money and gain significantly
without authorities noticing. This
reticent nature of hedge funds makes
them look suspicious and leads to
many apprehensions in the minds of
the investors, such as; these funds
are unethical, speculative and
risky. Also their high price tag and
the extravagant amount of money
required for their initial purchase
makes people think that the
investors are being hood winked into
putting money into these funds. Only
ensuring high levels of transparency
in the working of the hedge fund
industry so that an investor knows
exactly where his money is going can
clear these apprehensions. Moreover,
better regulation will produce more
accountable hedge fund managers in
future and the investors would be
able to simply research the
background of a hedge fund manager
before entrusting their money into
his hands.
Another negative aspect of the
non-regulation of hedge funds is
that there are no official hedge
fund statistics. Most hedge fund
holders are large companies and
hence, little is known about their
financial movements. Hedge funds are
based in offshore jurisdictions,
making them look even more
suspicious. For instance, unlike
mutual funds that have a base in
large cities like New York, hedge
funds are based in places like
Bermuda, Cayman Islands, and the
Virgin Islands. Hedge funds also
have a higher failure rate than
traditional funds. Many of them fail
by the second or third year of
operation. It has been estimated
that about 5.7% of the existing 8500
hedge funds closed in 2005. This
vulnerability to quick falls that
can be detrimental and can lead to
sudden losses can be brought down
with the help of regulations. In
London, the techniques used for the
hedge funds operating from there,
have bothered the Financial Services
Authority. Hence, to check the
functioning of this industry, the
FSA has now decided to start
regulating hedge funds and their
managers. Also, a special hedge fund
unit has been set up to determine
how the London hedge fund industry
which has been estimated at
£500-billion, can be controlled
better. However, the Canadian
Securities Administrators that is
the umbrella organization for
Canada’s provincial securities
commissions has decided that the
currently existing rules for
investment vehicles are sufficient
to regulate the burgeoning Canadian
hedge fund industry (a $30-billion
industry). This implies that no
additional rules and regulations
would be laid down specifically for
hedge funds in Canada. Thus, with
the proper regulations in place, the
clouds of suspicion and uncertainty
that are hovering over the hedge
fund industry will certainly clear
up and would pave the way for a much
safer hedge fund market that would
attract a larger number of investors.
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