International regulators have launched a probe into the influence of hedge funds and the extent of the risks they pose to their investors.
The study was revealed last week by the International Organization of Securities Commissions (IOSCO), a body of international market regulators, and will examine the risks to investors of buying into hedge funds. The watchdog group has veered away from previous studies that examined general market risks created by the fast-growing funds.
“They have started to be commercialized to individual investors,” said Michael Prada, chairman of IOSCO’s technical committee, at a conference in Frankfurt last week. “Securities regulators have to make sure hedge funds have sound rules and prudent practices when it comes to administration, risk management and valuation of the funds.”
In the past, regulators like the UK’s Financial Services Authority (FSA) have stopped short of looking at hedge funds’ risk to investors, focusing instead on market influence and risk as a whole, often suggesting tighter regulations or increased monitoring.
Earlier attempts at bolstering hedge fund regulation have been met with resistance and fear that a constricted atmosphere would simply push the industry offshore. IOSCO assured that it plans to work closely with the hedge fund industry in shaping the regulations, but have not set a date of completion for the study.