Hong Kong Says Hedge Funds Provided Inaccurate Data

Date: Tuesday, October 28, 2008
Author: Bei Hu, Bloomberg

Some hedge fund managers provided inaccurate information to investors in newsletters and monthly fact sheets, Hong Kong's Securities and Futures Commission said.

In one instance, the hedge fund manager excluded the fund's largest stock holding from its top five investments because of ``oversight,'' the regulator said in a statement issued late yesterday to all licensed hedge fund companies in the city. In other cases, the managers misstated the funds' debt ratios and net asset values ``to a limited extent.''

The findings were results of a recent SFC inspection of eight small locally established hedge fund managers overseeing $5 million to $800 million and employing three to 30 people. The regulator didn't identify the managers involved. Ernest Kong, a SFC spokesman, declined to provide further comments.

Regulators worldwide have been increasing oversight over the $1.7 trillion hedge fund industry amid a crisis that has laden the world's largest banks and securities firms with more than $670 billion of losses and led to the failure of Lehman Brothers Holdings Inc. Hedge funds are bracing for the industry's worst year in almost 20 years and trying to stem investor withdrawals.

``There's a great deal of discussion at the moment about how regulatory policies globally are going to change following the current crisis,'' said Peter Douglas, principal of Singapore-based hedge fund consulting firm GFIA Pte. ``My guess is that any story that talks about a regulator's comment is going to be of great interest.''

Better Disclosure

Douglas, also the Asia-Pacific representative of the hedge fund industry association, Alternative Investment Management Association, said the financial crisis and growingly fickle investors are increasing transparency in the Asian hedge fund industry.

``If anything, I see it getting better because investors are requiring a great deal more and a great deal more frequent information,'' he said. ``Generally hedge fund disclosure is very good because their investor base is all professional investors who require rather more sophisticated information flow than would a typical mutual fund investor.''

SFC warned hedge fund managers' so-called side letters with certain investors may result in unfair treatment of others. Side letters are agreements in addition to the standard fund offering document in which preferential redemption rights and additional information disclosure are promised to certain investors.

Risk Management

The regulator urged hedge fund managers to disclose ``material terms to all existing and potential investors'' and highlight to all that side letters have been agreed on with certain investors with significant shareholdings.

The regulator also demanded fund managers improve risk management. Some of the inspected fund managers still use their chief investment officer as risk manager, ``depriving the business of the important check and balance of an independent risk management officer,'' the statement said.

One fund manager hasn't updated the parameters used for its proprietary trading model for many years, the SFC said.

Hedge funds are mostly private pools of capital whose managers participate substantially in profits from their bets on whether the prices of assets will rise or fall.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.