SCRAMBLING to deal with Malaysia's new exchange controls, Hong Kong fund managers are suspending some funds, discounting others and segregating the Malaysian assets in still others - a complicated undertaking that raises difficult questions of equity and law. Fund managers were thrown into these uncharted waters as a result of Malaysian Prime Minister Mahathir Mohamad's decision this month to, among other things, require foreigners to hold ringgit proceeds of Malaysian-share sales for at least a year and obtain approval from the central bank before repatriating funds. The Investment Funds Association (IFA), the trade group for Hong Kong's fund-management industry, has issued guidelines urging a three-tier approach - suspending, discounting or segregating, depending on the extent of Malaysian exposure. 'The valuation methods used should ensure that the fund's net asset values are determined on an equitable basis and are in all circumstances fair to purchasing, redeeming and existing investors,' the IFA said. Estimates of the amount of money at issue vary. Foreign holdings in ringgit-denominated stocks and bonds range from US$5 billion to $10 billion, but Hong Kong investors represent only a small portion of that. Fund-tracker Lipper Analytical Services Asia said there were a dozen locally authorised Malaysia and Malaysia-Singapore unit trusts holding about $83 million as of August 31. The Securities and Exchange Commission puts the number of locally authorised regional funds with Malaysian exposure at about 90. The IFA recommends that trading of unit trusts with more than 30 per cent of their assets in Malaysia be suspended, Malaysian holdings of trusts with less than 10 per cent of assets in Malaysia be discounted, and Malaysian assets of trusts with more than 10 per cent but less than 30 per cent of their assets in Malaysia be segregated. A director of Jardine Fleming Unit Trusts - five of whose funds have been affected by the new exchange controls - Tony McDonald, said: 'Where you've got a suspended trust, it's pretty easy, because it's suspended. 'Where you've got a discount, it's fairly easy, because that discount is picked up in the unit price. Where it is interesting is where you adopt the quarantining approach.' Under the IFA guidelines, which are voluntary, managers of funds with intermediate exposure to Malaysia are being asked to 'ring fence' Malaysian assets. In other words, the Malaysian assets are segregated and valued at zero - although they will continue to exist. A 'snapshot' of the register of unit holders is taken, identifying all investors with a stake in the Malaysian assets. Then, at some future date when the value of the assets can be realised, these unit holders receive a special distribution. There are problems with this approach in terms of its administrative complexity, the legality of making a distribution to only one set of investors, the possibility that active management of Malaysian assets could 'reset' the 12-month holding period and, finally, the ability of investors to understand what is being done. But Mr McDonald downplayed the administrative difficulties, suggesting that the register of investors in affected funds was unlikely to be fluid and its static state would keep the accounting fairly simple. 'I don't think the problem is as large as it could be because, frankly, there won't be a lot of people investing,' he said. 'In the short term, we are not envisioning that there will be people filling their boots with the Asean fund, because why would you? I think the prudent investor is taking pretty much a wait-and-see [attitude].' In fact, investors' attitudes are by far the greatest worry. IFA members have expressed concern about redemption levels and the impact of uncertainty surrounding the special distribution. Mr McDonald pointed to the importance of investor education. Most fund houses have sent out letters to investors affected by the developments in Malaysia. Some also have placed explanatory advertisements in local newspapers. Investors with questions should feel free to call their fund managers and ask for answers.