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Switzerland is the world's second largest market
for funds of hedge funds, after the US, with most assets invested in offshore hedge funds.
There are nearly 256 registered and supervised
hedge funds in Switzerland approved for public
distribution (up from 39 in 2001), with total assets
of around US$9.4 billion in 2005 (compared with US$273.8
billion invested in all registered Swiss funds).
Almost all these funds are structured as funds
of hedge funds.
Most assets invested in hedge funds in
Switzerland are in offshore funds that are not
registered or regulated in Switzerland. These funds are available for distribution in
Switzerland only to qualified investors*.
For hedge funds and funds of hedge funds
registered in Switzerland, the licensing process and
supervision appear to be well focused.
In general, the licensing procedures are stricter
than those for traditional funds. They emphasize the
professional quality of fund management and involve interviews with fund
representatives and a qualitative assessment of fund
managers, risk management systems, reporting lines
and internal risk controls.
Although not specified in the
regulations, registered hedge funds are also subject
to a stricter audit regime during the first two
years after inception.
The protection of hedge fund investors is pursued
through transparency requirements.
Prospectuses must include a special risk-warning
clause that has to be approved by the Swiss Federal
Banking Commission, as well as detailed
information on the fund investment policy,
characteristics and special risks.
Target funds are always shown in the annual and
semi-annual reports of funds of hedge funds, and
investors must be given the right of redemption
at least four times per year.
Statutory restrictions on hedge
fund operations are minimal and mainly designed to safeguard the special structure of funds of
hedge funds.
For example, short sales or investments in
another fund of hedge funds are not allowed. A 6:1
limit on leverage is imposed in addition to a 30%
limit on a fund's assets invested in target funds
managed by the same manager.
| * Estimates indicate that there
are more than 150 hedge funds and funds of hedge
funds offered by Swiss financial companies domiciled
abroad, with an asset volume of about US$200
billion, against an estimated US$1.4 trillion
worldwide. |
Switzerland participates regularly in
international initiatives to analyze and address
developments in the fast growing hedge fund
industry.
The Swiss Federal Banking Commission (SFBC) works
closely with the relevant international supervisors
on this issue, particularly the US Federal Reserve
and the UK Financial Services Authority (a).
In addition, the SFBC monitors exposures of the
two large banks (UBS and Credit Suisse) to hedge
funds on a regular basis and now conducts a detailed
annual review of their overall exposures (b).
The large banks have reportedly strengthened the
corresponding control processes in recent years and
have clear policies in place as regards their
relationships with hedge funds and assessment of
each fund's risk.
In view of the growing exposure to hedge funds,
it is important for the SFBC to conduct focused
audits of banks' risk management vis-a-vis hedge
funds.
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(a) Recently, the SFBC
participated with the US and the UK supervisory
authorities in an exercise that also included the
two large Swiss banks and other
internationally active banks to investigate more
closely lending standards applied to the hedge fund
industry. (b) This includes positions held
on the banks' own books and on behalf of clients.
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