HFX Capital is planning to set up an Irish-based $1bn (€740m) hedge fund that will target distressed opportunities. An application for approval of the three-year closed-ended fund as a qualifying investor fund is expected to be made to the Financial Regulator in the near future.

John Reidy, CEO of HFX Capital, which will manage the fund, said it will be broadly based, looking at hedge funds from a global perspective and taking an agnostic attitude to asset classes. However, the focus will largely be on distressed investors holding hedge fund shares they are unable to redeem who are willing to sell at a discount.

"With all that is going on in the market at the moment there is a considerable amount of illiquid assets or distressed sellers out there – those assets were not illiquid originally but they are now," Reidy said.

The minimum investment will be $1m and it is expected the main source of funding will be institutional investors. Reidy said investments are expected to be much higher than the minimum.

EU internal market commissioner Charlie McCreevy recently introduced a review of the hedge fund industry which is of critical importance to Ireland, which had €1.7 trillion of alternative investments under administration at the end of November 2008.

Documents seen by the Sunday Tribune show the Financial Regulator suggested "any initiatives undertaken" should be done in co-operation with the US and other jurisdictions.

"It would not appear appropriate to focus specifically on hedge funds in relation to systemic risk issues, particularly where it may not be possible to require information directly from many on them," it said, adding it does "not believe retail investors should be excluded from participation in the alternative investment sector but we support calls for a harmonised approach in this area".

The Irish Funds Industry Association said it supports restrictions on so-called "naked short selling" and also supported the up-tick rule which prevents short selling that results in "unwarranted asset price falls". It said any initiatives focused on market reform should apply to all market participants. It did suggest that corporate governance and structural integrity should received targeted assessment.

"We do not consider hedge funds to be a source of systemic risk," it said, adding that hedge funds typically have less leverage than other market participants.

Lawyers Dillon Eustace also made a submission stating that "indirect regulation can be effective if properly monitored and enforced; therefore wholesale direct regulation is not required".

Fund administrator State Street, one of Ireland's largest employers, said the initiative "would be frustrated by the absence of a clear-cut definition of the hedge fund industry and would lead to unintended consequences".