Which hedge fund industry has managed to grow by 5 times in the abysmal economic climate of the past 6 years? The answer is Israel. National newspaper Haaretz reports that although the industry is tiny at just $1.6 bn total AUM, it has still enjoyed huge growth and recognition among investors and businesses alike.

There are some 60 registered funds operating in Israel at the moment and there is a growing trend for top banking and asset management talent moving over to the hedge fund side. The attraction is the ability to short sell and invest in a wider range of asset types.

However, with such impressive growth numbers, many are questioning why the industry cannot break-through into even higher AUM numbers.

The country appears to be stuck in a catch-22 situation from a regulatory perspective. On the one hand, the Israeli tax laws are crippling on investors who are obligated to pay capital gains on an annual basis, even if they haven't redeemed any capital. On the other hand, the regulatory environment isn't mature enough to give confidence to foreign investors.

Therefore, the country needs to come up with a plan of action on how to correctly incentive funds and investors to grow the local hedge fund industry.

In the meantime, industry leaders are doing their best to "self-regulate" by moving to a multi-prime broker model, increase transparency and improving risk management.