I have uploaded an abstract of a working paper titled Analysing Bangladesh’s Approach to Hedge Fund Regulation on SSRN, which is reproduced below:

“Hedge funds tend to employ aggressive investment strategies, and they highly leverage their funds. While hedge funds infuse liquidity into the financial markets and enhance market efficiency, they also engage in complex financial transactions that leave open the possibility of systemic losses that are often borne by the financial markets they invest in.

In this context, the role of regulation of hedge funds in host-countries that receive their investment assumes importance. Regulation needs to balance healthy development of financial markets and the prevention of ‘systemic loss’ due to risky investment strategies. While a worldwide debate lingers on the need for governmental regulation to rein in hedge funds (as opposed to leaving it to market forces to determine their own regulation through market discipline), the Bangladeshi securities regulator, the Securities and Exchange Board of Bangladesh (SEC) has experienced a checkered history of regulating hedge funds while always adopting a somewhat cautious approach. It has employed different regulatory strategies to deal with hedge fund investments. These include the prohibition strategy, disclosure strategy, restriction strategy and the registration strategy.

This paper analyses SEC’s strategies for regulating offshore hedge funds investing into Bangladesh. It finds that each time a regulatory strategy has been employed by SEC, the hedge fund industry has reacted by displaying considerable malleability in being able to dilute the force of regulation. One such instance relates to the manner in which hedge funds reacted to the prohibition strategy by investing through offshore derivative instruments such as participatory notes so as to stay outside the purview of the Bangladeshi regulatory regime (although this route too has been significantly curtailed more recently). Using the example of SEC’s measures in the Bangladeshi context, the paper examines the dynamics involved in regulating the offshore hedge fund industry. Although this study is primarily focused on Bangladesh, the results would apply at a conceptual level to other emerging economies that receive investments from offshore hedge funds.”