This study aims to look at the definition of the group of alternative investments commonly known as ‘hedge funds’, in order to better understand why regulatory bodies the world over are vehemently working on introducing new legislation and guidelines as a means of maintaining market security and integrity in order to ensure adequate investor protection. This study posits that the two most viable options available to regulatory bodies to ensure effective implementation of these changes are (i) to either further restrict access to hedge funds and thereby curb their ‘retailization’ and/or (ii) to introduce rigorous levels of disclosure on the part of hedge funds and their intermediaries.
It is the objective of this study to establish that for either of these options to be attained, tangible improvement in both the quantity and quality of information disclosure from hedge funds and their intermediaries about their positions, strategies and exposures in a manner that would enable them to continue to provide the market efficiency-enhancing services that they currently offer. After introducing all the key issues that have motivated this resolve, the study looks at the current regulatory environment and the challenges facing regulators such as the varying degrees of banking freedom offered by different states and jurisdictions. Proposed changes to current legislation are also considered across several jurisdictions. The results from the local market field study set the platform for recommendations to be investigated in future studies in order to provide guidelines for the supervision of the hedge fund industry.
Table of Contents
CHAPTER 1 INTRODUCTION
1.1 Statement of Problem
1.2 Aims of the research
1.3 Importance of the study
1.4 Research methodology
1.5 Scope and limitations of the study
1.6 Brief overview of the study
1.7 Abbreviations and acronyms
CHAPTER 2 DEFINITION AND DESCRIPTION OF HEDGE FUNDS
2.1 The origin of hedge funds
2.2 The Investment process
2.2.1 Qualification requirements for US hedge funds
2.2.2 Investor restrictions for US hedge funds
2.2.3 Hedge fund structures
2.2.4 Investment strategies and styles
2.2.5 Advantages and benefits of hedge funds
2.3 Summary
CHAPTER 3 REPORTING STANDARDS AND REQUIREMENTS
3.1 Introduction
3.2 Criticism of hedge funds
3.3 Transparency
3.3.1 Standards and requirements
3.3.2 Investor due diligence
3.3.3 Investment mandate adherence
3.4 Benchmarking and performance measurement
3.4.1 Valuation of Assets
3.4.2 Return Calculation
3.4.3 Dispersion of returns
3.5 Risk Management
3.5.1 Efficient Frontier
3.5.2 Mean-Variance
3.5.3 The Sharpe Ratio
3.5.4 Value at Risk (VaR)
3.5.5 Correlation and the effect of ‘herding’
3.6 Management fees
3.7 Index Surveys
3.7.1 Survivorship Bias
3.7.2 Selection Bias
3.7.3 Instant History Bias
3.8 Fund of Funds
3.9 Summary
CHAPTER 4 REGULATION AND SUPERVISION OF HEDGE FUNDS
4.1 Current regulation
4.1.1 USA
4.1.2 UK
4.1.3 Other countries
4.1.3.1 Hong Kong
4.1.3.2 Ireland
4.1.4 South Africa
4.2 Proposed regulatory changes
4.2.1 USA
4.2.2 UK
4.2.3 Other countries
4.2.3.1 Hong Kong
4.2.3.2 Ireland
4.2.4 South Africa
4.3 Summary
CHAPTER 5 EMPIRICAL RESEARCH
5.1 The plan and procedures of the study
5.2 Empirical Research
5.3 Summary
CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS
6.1 Summary of findings and conclusions
6.2 Recommendations
6.3 Suggestions for further research
Research Objectives and Themes
This study aims to examine the definition of hedge funds and the regulatory challenges associated with them. The primary research goal is to determine how regulatory bodies can ensure market integrity and investor protection, specifically by evaluating whether stricter regulation through enhanced disclosure or restricted access is the most viable path forward.
- The role of disclosure and transparency in the hedge fund industry.
- Regulatory frameworks and challenges across different global jurisdictions.
- Risk management practices and benchmarking complexities.
- The impact of 'retailization' on market security and investor suitability.
- Empirical findings on current industry perspectives regarding regulation and reporting standards.
Excerpt from the Book
2.1 The origin of hedge funds
In attempting to add clarity to the definition of hedge funds Bookstabber (1991) notes that:
“In terms of leverage, hedge funds are the entire universe except those funds that are restricted to leverage no greater than 1. In terms of positions, they are the entire universe except those funds that are restricted to long only. In terms of securities, hedge funds are the entire universe except those funds that are restricted to a somewhat arbitrary and generally evolving set of traditional assets”.
To better understand these attempts at defining hedge funds, it is important to analyse the origin of hedge funds. Alfred W, Jones’ initial application of the term “hedge fund” was appropriate given the strict adherence to the equally long/short strategies employed by his investment structure. However, a plethora of investing strategies that have since evolved now cover such a broad spectrum as to negate the continued practical relevance of the use of the term.
So convinced was Jones of the viability of his hedging strategy that he pioneered two concepts that have remained hallmarks of the industry to this day. Firstly, he introduced a compensation fee of 20% of the fund’s realised profit for his managers. Secondly, most probably to allay the fears of investors, he personally invested significantly into the funds, thereby ensuring that his fortunes were irrevocably tied to those of his investors. It was not until “The Jones Nobody Keeps Up With” article (Loomis, 1966) appeared in Forbes magazine that hedge funds were introduced to the public on a broad scale. The article described how Jones’ funds had attained net of fee returns that were substantially higher than those of the best performing mutual funds. Subsequently several hedge funds sprouted as other investment managers sought to emulate Jones’ success.
Summary of Chapters
CHAPTER 1 INTRODUCTION: This chapter defines the scope of the study, outlines the research problem regarding hedge fund regulation, and establishes the importance of addressing the current knowledge gap in investor protection.
CHAPTER 2 DEFINITION AND DESCRIPTION OF HEDGE FUNDS: This chapter traces the origins of hedge funds, explores the investment process, and discusses various strategies and the fundamental characteristics that distinguish these vehicles from traditional investments.
CHAPTER 3 REPORTING STANDARDS AND REQUIREMENTS: This section investigates the critical need for transparency, risk management, and the complexities of performance benchmarking in an industry traditionally defined by secrecy.
CHAPTER 4 REGULATION AND SUPERVISION OF HEDGE FUNDS: This chapter provides a comparative review of existing and proposed regulatory structures for hedge funds in the USA, UK, Hong Kong, Ireland, and South Africa.
CHAPTER 5 EMPIRICAL RESEARCH: This chapter details the methodology of a questionnaire survey conducted among industry role players, presenting and analyzing their views on regulation, disclosure, and compliance.
CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS: This final chapter synthesizes the research findings and offers recommendations for improving hedge fund regulation and investor education within the South African context and globally.
Key Words
Hedge Funds, Regulation, Disclosure Requirements, Transparency, Investor Protection, Market Integrity, Fund of Funds (FOF), Risk Management, Sharpe Ratio, Leverage, Retailization, Benchmarking, Performance Measurement, South Africa, Empirical Research.
Frequently Asked Questions
What is the primary focus of this research?
The research focuses on the challenges of regulating the hedge fund industry, specifically investigating the necessity for improved disclosure requirements to maintain market security and integrity.
What are the core themes addressed in the work?
The core themes include the definition of hedge funds, transparency concerns, risk management tools, regulatory environments in various jurisdictions, and the debate surrounding the 'retailization' of hedge funds.
What is the research goal or core question?
The central question is how regulatory authorities can effectively implement changes in the hedge fund industry—specifically, whether they should further restrict access or introduce rigorous levels of disclosure.
What methodology does the author use?
The author uses a combination of academic literature review and empirical research, consisting of a questionnaire survey distributed to hedge fund-affiliated firms and professional experts.
What topics are covered in the main body of the text?
The main body covers the history and definition of hedge funds, reporting standards, benchmarking and risk management methodologies, and a comparative analysis of regulatory structures across several countries.
Which keywords characterize this study?
Key terms include Hedge Funds, Regulation, Disclosure Requirements, Transparency, Investor Protection, Risk Management, and Retailization.
How does the study address the lack of transparency in hedge funds?
The study argues that transparency is a "double-edged sword" and explores the tension between a hedge fund's need to protect its trading strategies and the regulator's need for information to protect investors.
What specific findings regarding South African regulation are highlighted?
The study highlights that the South African hedge fund industry is currently unregulated and identifies the need for a consultative approach to regulation, potentially involving a self-regulatory unit financed by industry participants.
- Quote paper
- LL.M. Russell Mutingwende (Author), 2005, The Challenge of Reigning-in Hedge Funds through Regulation and the Need to Improve Disclosure Requirements, Munich, GRIN Verlag, https://www.grin.com/document/86639
