Vol. 570 No. 2
73 Mr. Gormley asked the Tánaiste and Minister for Enterprise, Trade and Employment the structure which exists for the regulation of hedge funds which are registered or incorporated within the State; and her plans for the introduction of further regulation of such funds concentrating on consumer protection requirements and the regulation of mandatory reporting conditions for such funds. [18590/03]
There is no statutory or common definition of the term "hedge fund". The term is a loose description of many different types of investment funds or investment funds using a variety of investment techniques.
Investment funds are usually constituted as investment companies under Part XIII of the Companies Act 1990, as unit trusts under the Unit Trusts Act 1990 or as investment companies or unit trusts coming within the scope of the Undertakings for Collective Investment in Transferable Securities or UCITS regulations.
Investment funds are subject to authorisation and supervision by the Irish Financial Services Regulatory Authority, IFSRA, which is empowered under the relevant legislation to impose any conditions it considers necessary and prudent for the orderly and proper regulation of investment funds. I am informed by the IFSRA that it does not authorise hedge funds per se, but that it has authorised certain types of funds which have some of the characteristics of hedge funds. The authorisation of such funds is subject to conditions designed to protect the investor.
I understand from IFSRA that it has authorised approximately 50 such funds, the majority of which are what are known as qualifying investor funds while the remainder are professional investor funds. These funds are subject to certain conditions imposed by IFSRA including, in the case of qualifying investor funds, a minimum subscription requirement of €250,000 and investors are required to meet a net worth test and to certify in writing that they are aware of the risks involved in the investment. There are no limits on the investment strategies adopted. In the case of professional investor funds, the minimum subscription requirement is €125,000 and the investment strategies adopted are subject to limits.
I am further informed by IFSRA that following submissions from the Irish funds industry and in keeping with IFSRA's own view of the evolution of fund regulation in Ireland, it has indicated to the industry that it is prepared to consider the authorisation of investment funds with hedge fund characteristics at retail level subject to certain investor protection safeguards being incorporated in the product. I understand, however, that no such funds have been authorised by the authority to date. Furthermore, the authority does not consider it appropriate to authorise retail funds engaging directly in hedge fund strategies.
Additional informationAll investment funds authorised by IFSRA, whether or not they have some hedge fund characteristics, are subject to monthly reporting requirements in addition to more detailed six monthly reports and fully audited annual reports.
Aside from introducing new regulations implementing the UCITS management directive, I have no plans to introduce further regulation of investment funds. However, if IFSRA considers it necessary to strengthen the existing regulatory regime, it will make appropriate proposals to me in this regard.
The last part of the reply is the most important, with the Minister of State effectively saying we do not intend to regulate such hedge funds, though certain funds with the characteristics of hedge funds might be regulated in a separate category.
To help the Minister of State, the Oxford English Dictionary defines a hedge fund as one which minimises and protects against loss by counterbalancing one transaction, such as a bet, against another. That is the basic definition. One is placing two bets and leveraging that up through huge borrowings to match or extend out the principal that is offered. My concern is that there is a very dramatic increase in activity in the retail sector for Irish investors in these types of hedge funds. There is no doubt they are extremely risky funds in that while they can make very significant returns they can also make dramatic losses, as is shown by the collapse of long-term American capital funds in recent years.
We do not necessarily need to apply the same regulations as in the case of pension or mutual funds, which have proper regulations, but the investor should at least know, when getting into such a fund, the nature of the gamble he or she is about to undertake. There should be some sort of performance record available publicly, by State regulation, to show exactly how those funds perform. That does not exist at present and it is a minimum requirement the Minister of State should propose for the safety of Irish investors.
The IFSRA is responsible for the regulation of investment funds. It is empowered under various Acts governing investment funds to impose any conditions it considers necessary and prudent for the orderly and proper regulation of investment funds. The responsibility for giving information, as suggested by Deputy Ryan, is something the IFSRA could consider, as the Government has given it the responsibility for regulation.
Can the Tánaiste issue a direction to the regulator?
No, as far as I am aware she cannot.
Will the Minister of State get back to me on that?
Yes.
