Canadian Banks Call for Tougher Hedge Fund Regulations

Major Canadian banks have joined the chorus of American shareholder advocates in asking regulators to increase regulations for hedge funds, as alternative investments become more popular with individual investors, The Globe and Mail reports.

Gordon Nixon, chief executive officer at Royal Bank of Canada, said the speed at which the hedge fund market is growing throughout North America is cause for alarm. Canadian hedge fund assets reached $11.7 billion (C$14.4 billion) in June, a sharp upturn from $2 billion (C$2.5 billion) in 1999, according to Toronto-based Investor Economics.

Canada's hedge fund industry is growing by 46% per year, approximately 10 times faster than the U.S. market. The hedge fund growth rate in Canada is even higher after factoring in pension plan assets, which raises the country's cumulative hedge fund assets to $21.6 billion (C$26.6 billion) concentrated in 191 portfolios.

Canadian banking executives are particularly alarmed by hedge funds' appetite for corporate loans and derivatives. These types of assets bottomed out a few years ago when the country experienced a large upset in its credit market. Another upset in the credit market could undermine the banks' credibility if a large number of retail investors who invest in hedge funds are harmed.