The investigations are still unfolding in the US, but the two main issues at this stage are market timing, in which some investors are allowed to buy and sell shares in the fund very rapidly, and late trading, in which they are allowed to trade shares after the price has been fixed for the day. While market timing is not illegal, most mutual funds do not allow it. Late trading is illegal, but difficult to detect.

So far some of the biggest and most respected names in the US mutual funds world have felt the heat of the latest Spitzer-led investigation, including Morgan Stanley, Putnam Investments, Citigroup, Merrill Lynch, Invesco and Janus Capital.

With almost daily reports of abuses coming out of the US, Hong Kong investment fund unit-holders cannot help but ask themselves whether or not the funds they hold could be engaging in similar practices.

There are currently no US-domiciled funds authorised for sale to the public in Hong Kong. Most are domiciled in Luxembourg or Dublin, with a few domiciled locally.

Fund houses are regulated by the Securities and Futures Commission (SFC) and funds can only be marketed to the public once they have gone through the SFC's stringent registration procedure.

The regulatory framework for how funds deal and execute trades is the SFC Code of Conduct and Guidelines on Internal Controls. Fund houses have to comply with the code and can be disciplined if they do not.

'In general, the SFC monitors and evaluates the trading practices as well as the standards of controls and risk management among its licensees, including fund managers, through routine on-site inspections,' SFC spokesman Chan Chi-keung said.

On a day-to-day basis, it is a mutual fund's board of directors or, in the case of a unit trust, the trustee, that is responsible for ensuring investors' interests are safeguarded. However, as is the case in the US, the boards are not necessarily independent of the fund manager.

'There is no requirement to have independent directors on the boards of mutual funds,' said David Webb, editor of webb-site.com and veteran campaigner for better corporate governance.

Unlike the management of a listed company, the fund manager has no direct financial interest in the fund. 'There is no reason for the manager to have a member on the board of directors. Whatever is going on in the US is probably going on here as well and it's up to the regulators to satisfy themselves that it's not happening here,' Mr Webb said.

At this point the local regulator is taking a low-key approach. 'The SFC is closely monitoring the developments abroad and in the US in particular and has already engaged in discussions with fellow regulators about their approaches to the issues raised by Spitzer,' Mr Chan said.

So far nothing illegal has come to light in the local funds industry, but with all due respect to the SFC, and to the concept that one is innocent until proven guilty, lack of evidence of illegal activity does not mean that nothing illegal is going on. Malpractice in the US mutual funds industry did not emerge until Mr Spitzer went looking for it.

The question for local investors is whether activities such as late trading and market timing actually matter. The answer is yes, they do.

'In the US there is a creeping erosion of fund-holder value,' Mr Webb said. '[The illegal activities] don't take great bites out of value but taking a little bit each day adds up to an estimated 1 per cent to 2 per cent a year, which is a lot for a long-term investor in the fund.'