Managers advised to be cautious on liberalisation in Asian markets

LaunchesPeople MovesPrime BrokerageRegulation
14 Feb, 2012

Market liberalisation underway in various Asian jurisdictions should be welcomed by hedge funds although it is important for managers not to get carried away by developments.

In June 2011, it was announced that South Korea was encouraging hedge funds to establish themselves onshore. Despite this positive development, some argue that South Korea’s hedge fund market is still in its infancy and it is unlikely there will be a massive influx of foreign players.

“South Korea still has currency controls and it is a restricted market. The rules will encourage more onshore business and domestic long/short Korean equity-focused funds. I doubt many foreign funds will move there but it is still a work in progress,” commented Colin Lunn, executive director and head of business development and client services for Asia Pacific fund services at UBS.

Under the proposed new regulations, individuals can allocate to hedge funds providing they meet a minimum investment requirement of 500 million Korean Won while borrowing limits for managers have been increased. Hedge funds will also need 6 billion won capital and three fund managers with a verifiable track record to gain regulatory approval

South Korea, akin to several eurozone economies, has also instigated short-selling restrictions raising questions about the likely proliferation of hedge funds in the jurisdiction. However, Glenn Kennedy, regional head of sales for alternatives in Asia-Pacific for HSBC Securities Services, acknowledged this was an exciting time for managers in the region despite the restrictions.

In January 2012, it was also announced Beijing would launch its much mooted Centralised Securities Lending Exchange, which would facilitate short-selling. “China, obviously is a huge market and has the capacity and liquidity to develop a hedge fund industry. China has repeatedly said it wants to encourage an asset management business covering all asset classes to thrive. They are already building a futures market and developing short selling rules and I anticipate it will be successful in the long-term,” said Lunn.

While the Chinese decision should be welcomed, experts warn it is important not become overexcited. China is a huge market although there are still many other regions in Asia, which have yet to fully open up their markets. Different markets have different rules and regulations making marketing and short-selling a complex and onerous task. Unless more uniform rules governing Asia, or ASEAN, come into being, the region’s hedge fund industry will take a long time to mature.

“I suspect it will be a two pronged development process between Greater China covering China, Hong Kong and Taiwan; and South East Asia, which will incorporate Singapore and other regional economies, with Australia working with both. However, I think full uniformity, should it ever come to pass, is many, many years down the track,” highlighted Lunn.