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Regulator keeps eye on trading in hedge funds

The Ontario Securities Commission says it is monitoring trading activity in the country's burgeoning hedge fund sector but has no immediate plans to follow U.S. regulators and make these investments more transparent.

The OSC is gathering information and monitoring activity in hedge funds, Leslie Byberg, manager of investment funds, said in an interview yesterday. "We are aware that there are developments in this area."

She was responding to Canada's major banks, which this week called for greater regulatory scrutiny of the secretive hedge fund industry amid concerns that smaller, unsophisticated investors are jumping into the market.

A compliance review of investment firms by the OSC published last July reveals that bank executives may have good reason to be worried.

The review turned up a disturbing number of weaknesses, including ineffective compliance programs, practices that did not conform with written policies and procedures, incomplete trade blotters, trade orders that were not time-stamped and personal trading procedures that failed to detect violations of the policy by employees.

That was the second review done by the OSC, which revealed that the problems had got worse, not better.

"Unfortunately, it appears that the incidence of some of these deficiencies has increased from the previous year as indicated by the higher percentage of firms being deficient," OSC compliance manager Marrianne Bridge said at the time. "In general, no significant improvements were noted from the previous year," she said.

In an interview yesterday she would not say how many firms were part of the reviews or whether the regulator has launched enforcement proceedings against any of them.

Jim McGovern, chief executive officer of Toronto-based Arrow Hedge Partners Inc., said the bank executives' concerns about hedge funds are misplaced.

"But it's always best to be worried and scared . . . than to say, 'everybody jump into them,' " he said. "It's easier to say, we need to be careful. That applies to any investment."

Mr. McGovern is also chairman of the Canadian chapter of the London-based Alternative Investment Management Association. AIMA has 75 members today, up from 38 just two years ago when it was founded.

Its growth has reflected that of the industry. Canadian hedge funds managed $14.1-billion in assets as of last June, compared with just $2.5-billion in 1999, according to Toronto consulting firm Investor Economics.

Hedge funds are investment pools that, as the name suggests, seek to hedge their bets or limit their risks through offsetting strategies, including short sales.

Mr. McGovern said individual investors are small players in a business dominated by institutional investors such as the Ontario Teachers Pension Plan and the Ontario Municipal Employees Retirement Board.

"They're not rushing in because they think they're going to get blown up or because they think these things are bad," Mr. McGovern said.

"They're rushing in because [hedge funds are] complementary to what they're doing in their other [investment] programs."

© 2007 The Globe and Mail. All rights reserved.

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