There are no clear definitions for hedge funds among many countries. The essential characteristics of hedge funds are to actively use a range of investment strategies, including short selling, leverage and derivatives. The scales of hedge funds become very large and grow rapidly due to the pursuit of absolute return. They generates a lot of controversies and debates due to the scandals of hedge funds during the past few years and their perceived effect on the stability of financial market during the financial crisis in 2008.
At first, the study approach of the paper examines the issues of hedge funds and whether their failures are due to excess leverage, improper risk management, and failures of government oversight. Hedge funds play an important role in providing liquidity, neutralizing risks, increasing the efficiency of capital markets, but not the major contributor of systemic risk. Supposing hedge funds are of an economic interest and value, we should improve the flaws of corporate governance and market regulation.
I compiled regulatory reforms from other countries and organizations, such as the EU, SRO, US, and the UK, which make proposals for hedge funds regulation. Furthermore, I will study the trends of laws and regulations, analyze their rationale, and conclusively agree to regulate hedge funds. Then I will consider the extent of social cost and resource allocation towards the aim of investors’ protection and market integrity from the perspectives of economic analysis of law.
After reviewing the domestic regulations of hedge funds, I will analyze the possibility of introducing hedge funds regulation into Taiwan. Finally, I will present our recommendations of long-term and short-term policies that are to require the registration, documentation and capital requirements of hedge funds or hedge fund managers.
The intended goals are to enhance transparency, eliminate conflicts of interest, introduce indirect regulation of market participants, cross-market collaboration, adopt macro-prudential regulation, investigate and prosecute illegal activities, collaborate with other countries and international organizations, and constrain the regulatory arbitrage for the paper’s conclusion.