"Hedge fund" pruned with blunt instruments

But, as always, nothing is ever that easy and investors in the Eifuku Master Fund are left wondering how it could have all gone so wrong so fast. And as always, there is the conflict between two simple proverbs: "Lightning never strikes the same place twice" and "history repeats itself." And as often, both are, to a degree true.

In 2002, Eifuku Master Fund grew by an astonishing 76%. Within the first five weeks of 2003, it had pretty much lost it all. Some reports say that the final collapse, at the beginning of January, was 98% in one week. The rumour mill is spinning in Japan, New York (because one of the Fund's main men was ex Lehman Brothers) and in hedge fund circles generally.

Reports suggest that George Soros' funds were exposed to more than half the total losses.

But the more interesting thing about the collapse is that the fund comes at about the time when these relatively unregulated funds are facing the prospect of being brought into the fold and away from their freewheeling days.

Regulators around the world are trying to decide which of two courses of action to take: loosen the restrictions on funds or increase regulation. Several, including the USA and the UK are electing to do both: "hedge funds" (which all too often are no such thing and the collapse of Eifuku Master Fund is alleged to be proof that the fund was not hedged but instead had all its eggs in a small number of ragged baskets) are expected to be allowed to market their services - at present they are generally restricted to word of mouth recommendation - and to take in a wider range of customers - at present, they are often restricted to those that meet some notional test of "sophisticated investor," a test which seems to mean old enough to know better. And rich enough not to have to.

In return for these new freedoms, the funds are likely to come into the fold so far as much financial services regulation is concerned. But they are not entirely happy about it. In the USA, the funds are not impressed with the realisation that they are to be subject to the Bank Secrecy Act. Outside the USA, many are startled to learn that they have been outside the ambit of that Act. This omission is just one of the ways that the USA has made a mockery of the Financial Action Task Force. And in the UK, such funds were clearly subject to The Money Laundering Regulations 1993 but many in the industry said "we are unregulated so the Regulations don't apply to us. The irony was that the funds were not unregulated at all: but the particular products they sold were outside the regulatory regime. Yet, because they could not publicise themselves, and were a sort of investors' club, they flew under the regulatory radar.

The collapse of another "hedge fund," regardless of the reasons for its failure, will be further ammunition to those who seek to control this form of fund. There will also be those who cheer that Soros, currently awaiting a date for his appeal against a conviction in a French court for insider dealing, has taken a drubbing.

But until there is some international agreement on the creation and management of such funds, there will always be calamities of this kind.

But next time, before investors pile into a fund, they might like to do a strange sort of due diligence - try saying the name slowly, one syllable at a time in a variety of languages. If investors in Eifuku had done that in an anglophone fashion, they may not have so keen to put their money where their mouth may not have wanted to go.