The booming $650-billion hedge fund industry will be forced to meet tighter regulations in the future, the US Security and Exchange Commission (SEC) yesterday announced.

But Bermuda - which holds a reported eight percent of the world's hedge fund assets - is already in the process of tightening legislation on the booming industry, which is expecting to expand to $1 trillion within the next ten years.

Yesterday, Bermuda International Business Association (BIBA) chairman Jeff Conyers said it was not clear how the newly issued SEC recommendations on the industry and Bermuda's upcoming legislation would affect one another.

“In simple terms, we may be ahead of the game,” he said.

But, the SEC recommendations were directed more specifically towards the growing appeal of hedge funds to retail - or small scale - investors while Bermuda deals primarily with large, institutionally-based hedge funds, Mr. Conyers said.

Hedge funds have traditionally been largely unregulated investment pools for the wealthy.

Only individual investors with net worth of at least $1 million tended to invest in hedge funds, whose managers often charge large performance fees.

But the strong performance of hedge funds despite an overall market decline has increased their appeal to small scale investors and, simultaneously, SEC fears that they could become efficient vehicles for fraud.

The main recommendation from the SEC yesterday was that all hedge fund managers should be registered.

But, in dealing primarily with institutional hedge funds, Bermuda has been more focused on regulating the fund itself, Mr. Conyers said.

“Bermuda will continue to monitor the situation. The hedge fund sector is very important to Bermuda and this is an important topic. But we tend to deal with very high net worth investors rather and not retail investors.”

Bermuda's portion of worldwide hedge fund activity is relatively small when compared with competitors such as the Cayman Islands, domicile to 35 percent of hedge fund business, or the United States, which has 26 percent.

But, with the sector growing over 200 percent in the last five years, it has been an area of focus for Government.

Calls from The Royal Gazette to Bermuda Monetary Authority chairman Cheryl-Ann Lister were not returned yesterday, but last week Ms Lister gave an interview to Dow Jones Newswire on the Island's efforts to improve hedge fund regulations.

The BMA is responsible for licensing and supervising banks, deposit companies and investment businesses. Ms Lister said she would like to have regulations on hedge funds clearly spelled out in legislation and that she expected new legislation to be introduced in Parliament later this year.

“The idea is not that we are anticipating a lot of problems or that we have had a lot of problems,” Ms Lister told Dow Jones Newswire. “We want to make sure we have a full array of tools to intervene ... quickly and with a minimal threat of legal challenge.”

She told the news service she hoped a stricter framework for the funds would make the Island a more attractive offshore destination rather than discourage potential investors.

“I'd like to think that's changed, and that enhancing our regulatory regime will in fact make us even more attractive as a jurisdiction,” Ms Lister said in the article. “Investors know the (Bermuda) funds in which they invest are subject to certain basic scrutiny.”

With the SEC's recommendations today and international efforts to combat money laundering by terrorist groups, hedge funds may be forced to become more receptive to demands for more openness.

And offshore hedge funds are said to account for much of the industry's growth.

“As in the U.S., Bermuda exempts funds that are available exclusively to the wealthy from most of regulatory oversight associated with retail funds, largely on theory that their investors are sophisticated enough to fend for themselves,” the Dow Jones Newswire article said.

“So long as they use an independent administrator with a presence in Bermuda, hedge funds can even keep custody of their clients assets in another jurisdiction. For this reason, the BMA relies heavily on administrators to keep tabs on the industry. Fund administrators price the securities in a fund's portfolio, calculate its net asset value and determine the percentage of assets attributable to each investor.”

The BMA will be introducing a licensing requirement for administrators and, according to the article, local hedge funds welcomed the BMA moves.

“Bermuda has lot of the kind of regulation that institutional hedge fund investors need and desire and not the kind that would be in the way,” said Mark Byrne of West End Capital Management in the story.