158 9
any financial business and its customers. Regulations provide a structure
that managers can conform to. In effect regulations provide a free guide
on how to run a financial services business. Where regulation is prin-
ciples based and not prescriptive, as in the UK, it is unfortunately not
adhered to enough as we shall see below.
To understand funds, investors must look at the regulatory envi-
ronment of both the fund and the manager, as well as the advisor
where there is one. An offshore fund tends to have little regulation
to comply with, especially in the traditional fund jurisdictions such
as the Cayman Islands. In comparison, the manager (or the advisor)
is normally in a jurisdiction with higher regulatory standards and
therefore needs to implement and follow procedures and report to the
regulator accordingly.
Compliance is important therefore on many levels including the fact
that a breach of certain rules could lead to a ban from the regulator.
This could leave your money without a manager, which would create
an immediate operational risk even in the context of an orderly liq-
uidation. So let me explain where I think you need to start with
compliance, what insights it can give you with little investigative
effort, and what to conclude about the various managers you might
come across in relation to their approach to compliance.
Compliance status
There are as many regulators as there are countries, at least in the
developed world. This does not make anything uniform and is not
easy for investors to follow. However, since regulation is largely a
matter of good business practice and common sense, the spirit of com-
pliance flows from state to state. Note that despite the harmonised
approach to regulation in the EU, European directives continue to be
implemented by each country as it sees fit, occasionally leading to
material differences.
Overall though you can work with the principles of good compliance
and it is lucky that there are only a few countries that host the major-
ity of funds and managers. Most commonly, regulated managers or
advisors are found in the following countries:
Compliance status 159
France (regulatory authority: Autori des Marchés Financres
Luxembourg (regulatory authority: Commission de Surveillance du
Secteur Financier (CSSF));
Switzerland (several independent regulators, including the Swiss
Financial Market Supervisory Authority (FINMA));
UK (regulatory authority: Financial Services Authority (FSA));
US (several independent regulators, including the Securities and
Exchange Commission (SEC), Financial Industry Regulatory
Authority (FINRA), National Futures Association (NFA) or the
Commodity Futures Trading Commission (CFTC)).
Note also that there are no hedge funds in the UK, only regulated
funds (although that may be in the process of changing), and that
in the US until recently most managers did not have to be regulated.
Therefore, when you are told of a hedge fund in the UK, that is simply
a misnomer and such funds do not exist. It is the manager or the advi-
sor that is regulated and that is in the UK. The fund’s relationship
to the manager as we saw before is one of delegation of responsibili-
ties notably in relation to asset management. I say this at the risk of
sounding obvious, because if you are going to find out about a regu-
lated company you need to know which one you are looking for.
You should consider the jurisdiction of the manager therefore and
whether the laws in that country require the manager to be authorised
and regulated. This is the case for the UK, as we have noted, but not
necessarily for Switzerland where regulation, other than anti-money
laundering provisions, generally only applies to managers that are
involved in managing Swiss domiciled funds.
In the US it is not always easy for foreigners to understand which
manager should be registered with which authority: for example, if a
manager offers and sells foreign futures contracts to customers located
in the US, then the manager must either register or apply for an
exemption to registration. However, for your purposes as an investor,
you should note that if a fund is trading futures its manager should be
registered with the NFA and CFTC (unless it qualifies for an exemp-
tion). So, it might be worth your time verifying any registration with

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