BEIJING, Jan. 14 -- China will see a more favourable environment including more openness, liquidity and interest from the investing public - for the development of hedge funds over the next three years, predicts a US expert.

    Hedge funds are a special type of mutual fund that can use one or more alternative investment strategies, including hedging against market downturns, investing in currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage.

    "Having discussed with the Chinese authorities, I believe that the consensus already seems to be developing that it is only a matter of time before hedge fund investing becomes a reality in China," said Jeffrey H Tucker, founding partner of the Fairfield Greenwich Group (FGG), a leading developer and investor in hedge funds.

    Currently hedge funds investing is forbidden due to concerns of its high risk and volatile nature. At the China Banking Regulatory Commission's annual meeting held in December 2005, Chairman Liu Mingkang reiterated the government's perception of hedge funds being one of the major forces behind the 1997-1998 Asian Financial Crisis. Yet he revealed that a special research committee had been set up looking into the ways of regulating the financial instrument in the China market.

    Hoping to give a push to the development of hedge funds in China, top officials from FGG toured Beijing and Shanghai over the past two weeks trying to educate the government and the investing public on the benefits as well as potential risks associated with hedge fund investing.

    "I would say that the most important ideas for those new to this area is that, traditionally, hedge funds were created to protect capital and to diversify and thus help to control risk. To 'hedge' means to protect from loss," said Tucker. "A misconception about hedge funds is the idea that all of them seek huge returns and do so by taking huge risks."

    Contrary to common perceptions, as Tucker further explained, most hedge funds do not use dangerous levels of leverage, which refers to the practice of using borrowed money rather than share capital to produce profits.

    Eighty-five per cent of hedge funds are within the Regulation T leverage, which is 1 to 1, while only 2 per cent of all funds use more than 5 to 1 leverage.

    As for the benefits hedge funds bring to the market, Tucker said they provided added liquidity and a more efficient market pricing mechanism.

    (Source: China Daily)