SFC Press release - Speech at Hedge Funds World 2006

The following is the text of a press release following on from Ms Alexa Lam's speech to Hedge Funds World in Hong Kong in September 2006:

Keynote Speech by Mrs Alexa Lam at the 9th Annual Hedge Funds World Asia

SFC’s Executive Director of Intermediaries and Investment Products, Mrs Alexa Lam, today gave the keynote speech at the 9th Annual Hedge Funds World Asia.

For those hedge fund managers looking to set up a base in Asia, Mrs Lam said: “Talented, creative, innovative and flexible fund managers need not look further, as Hong Kong is the market with liquidity, openness, depth and access to the exciting Mainland market. We are poised to benefit from receiving and managing the best opportunities the market has to offer.”

Mrs Lam said Hong Kong is one of the few jurisdictions where hedge funds are available to the retail market. She further said hedge funds should not be barred to retail investors, as long as the regulatory requirements were satisfied. She added that the SFC had set out a set of guidelines for hedge funds to be authorised by it for them to be offered to the public.

Mrs Lam said whilst private hedge funds were not required to be authorised by the SFC, if the funds committed fraud, insider dealing, or other market misconduct, they were still subject to the sanctions under applicable rules and regulations.

She said fund managers in Hong Kong were required to be licensed, regardless of whether the funds they managed were offered to the public or private investors. In this regard, the fund managers must satisfy the SFC that they had proper internal controls, expertise, financial resources and proper risk management systems in relation to their investment strategies and that they were fit and proper in general to be licensed.

Mrs Lam said licensed fund managers must continue to comply with the relevant rules and regulations including the Code of Conduct. The SFC conducted a round of theme inspections last year and had detected some weaknesses, which were by no means unique to Hong Kong.

Mrs Lam pointed out that the regulator’s job was not to ensure zero failure, but to remain vigilant of possible impact of the failure of a large hedge fund or a group of hedge funds on financial institutions with significant hedge fund exposures that might undermine financial stability.

She explained that systemic risk might arise from of a combination of factors, including (a) multiple layers of leverage; (b) multiple sources of exposure of credit providers; (c) market dynamics amplifying price movements; (d) use of complex derivatives and model-dependent valuation; and (e) interaction between credit, market and liquidity risks.