PricewaterhouseCoopers global hedge fund whitepaper puts transparency and tax issues top of agenda

NEW DELHI, 16 October, 2008 – PricewaterhouseCoopers released its sixth annual global hedge fund whitepaper which reviews and summarises the regulation, taxation and distribution of hedge funds around the world.

The paper titled, ‘Operational Risk: an alternative challenge’, considers that investor and regulatory pressure will cause the industry to be more transparent about its operational controls with investors.

As per the report, market volatility will cause investors to ask whether they have enough knowledge and comfort over the operational risks and controls at the hedge fund manager complex, responsible for their investment. This does not mean that the hedge fund manager has to make public the intricacies of the fund’s investment strategies, but it does mean that the operational control environment must be sufficiently robust to withstand proper scrutiny.

Gautam Mehra, India Leader for Investment Management practice, PricewaterhouseCoopers said:

“The last year’s report had predicted that the institutional money flowing into the industry would act as an impetus for more transparency and more robust control frameworks. It has been interesting to see the industry voluntarily producing its own best practice standards as it has done in the UK and as is currently being proposed in the US.

It remains to be seen whether adherence to this self-certification framework of standards will meet both investors’ and regulators’ oversight and monitoring requirements, especially in the backdrop of the significant volatility in the financial markets which has impacted adversely on hedge fund performance”

Currently, there are no regulations specific to investment by hedge funds in India. However, global hedge funds have been investing in India under various routes available to foreign investors including through the Foreign Institutional Investor (FII) route or sub-account thereof, as a Foreign Venture Capital Investor (FVCI) or through Participatory Notes (P Notes) issued by FII’s. SEBI, in the recent past had announced that regulations would be amended to permit global hedge funds to invest in India, provided such funds are regulated elsewhere in the world.

Gautam Mehra added:

“It is important to note that each such route adopted by a hedge fund has different tax consequences and issues to address. Apart from operational risks, managing tax liability will move centre stage as increasingly fiscally-challenged tax regimes focus more and more on cross-border capital flows. Withholdings taxes, beneficial ownership, substance and permanent establishment risk are all weapons in the armoury of tax-seeking fiscal authorities from the developed world to emerging economies.”

ENDS

Notes to Editor:

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