The CFA Institute, which represents the global community of certified financial analysts, is establishing an advocacy centre in Hong Kong to cover the Asia-Pacific region, and among its first projects is to introduce standards to the hedge fund industry.
Kurt Schacht, New York-based managing director at the Institute, says scandals such as Enron in the United States have prompted calls from various parts of the industry for a group such as the Institute to comment and push for best practices, as it is considered independent.
As a result the organization, which administers the CFA exam around the world, is setting up a global advocacy capacity from its centres in New York; London; Charlottesville, Virginia and Hong Kong.
"We're still viewed as a US-centric organization but this year for the first time the majority of CFA candidates come from outside the United States," says Schacht. The Institute is encouraging local CFAs to help local markets and regulators adopt global standards in areas such as corporate governance and performance measurement.
Lee Kha-Loon will head the group in Asia-Pacific from his base in Kuala Lumpur. Lee joined the Institute after serving as an accountant, analyst and treasurer for firms such as PricewaterhouseCoopers, Standard Chartered Bank and the Kwek family. Most recently he worked for Malaysia's Securities Commission for seven years, where he was involved in helping the regulator's initiatives in corporate governance.
Schacht says the organization is still looking for candidates in Hong Kong to act as policy advisors.
The Institute has recently drawn up a code of conduct for hedge fund managers, which it is now presenting to various regulators as a guide for reasonable oversight. Schacht says the past five years have been great for hedge funds but there is undoubtedly a gold-rush mentality and it would only take a few bad apples to spoil the industry for everyone. But, he says, the greater danger is that governments over-regulate the industry in an attempt to avoid problems.
The CFA Institute supported the US Securities and Exchange Commission's move to require hedge funds to register with it, but Schacht says this move is unlikely to deter or uncover fraud. What is really needed, he argues, is for a code of conduct so the industry can regulate itself.
Lee says this code comprises five basic objectives: better disclosure and standard valuation practices, so investors understand what's in a hedge fund's portfolio; disclosure to ensure the manager sticks to the fund's stated objective; measures to support best execution and close legal loopholes allowing insiders to cash out in advance of a crisis; a call for all managers to appoint a compliance officer; and rules regarding communicating with clients about performance, fees, trade allocations and potential conflicts of interest.
The first step is a survey that Lee will oversee of all regional members, to get an idea of the extent to which hedge funds in Asia and Japan already practice these goals. He will also be speaking with regulators and other industry bodies to advance these objectives.
Lee acknowledges the complexity of the job but notes that it took the Institute seven or eight years to make global investment performance standards (Gips) an ubiquitous requirement in fund manager mandates. He says already some institutional investors are including many of the CFA hedge fund standards in new mandates.