IOSCO decides to scrutinise funds of hedge funds

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Mumbai, After much discussion on hedge funds and their impact on markets, the International Organisation of Securities Commissions (IOSCO) has finally decided to scrutinise funds of hedge funds (FHFs) before issuing guidelines for their issuances.

Michel Prada, chairman, technical committee of IOSCO admitted that hedge funds have a valid place in the market as they bring in liquidity and efficiency into the system.

A fund of hedge funds is an investment company that invests in hedge funds — rather than investing in individual securities. It has become the most common vehicle in some markets for the industry to promote retail investment into alternative assets on a domestic as well as on a cross-border basis.

In the US, many registered funds of hedge funds have much lower investment subscription levels than individual hedge (or unregistered funds) funds and are popular with individual investors.

“A proper examination of the FHFs will help to clarify potential issues of concern and to consider developing elements of international regulatory standards based on the best market practices, " Prada added.

About the controversy surrounding hedge funds, Prada said, "It is partly due to complexity and partly due to the possible fears.”

IOSCO has published a consultation paper which examines the issues related to hedge funds valuation and administration. It is anticipated that following a period of consultation with the financial services community a Final Report on these issues will be published in due course, said Mr. Prada.

In a separate project IOSCO has recently decided to initiate a survey on funds of hedge funds, which have become the most common vehicle in some markets for the industry to promote retail investment into alternative assets on a domestic as well as on a cross-border basis. This project will help to clarify potential issues of concern and to consider developing elements of international regulatory standards based on best market practices.

Ownership of stock exchanges is the another issue that the IOSCO discussed. According to Mr. Prada, the restructuring of the trading venue "is a fact of life'' today. However, how it would affect or how it influences price formation and how price is discovered in such an environment are the key issues.

IOSCO believes that the role of credit rating agencies globally is witnessing a major change. Earlier credit rating agencies rated only corporates. Rating of structured financial products is a new role of credit rating agencies.

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