ASIC has finalised guidance on new disclosure benchmarks and principles for hedge funds to improve investor awareness of the risks associated with these products.
ASIC’s guide, Regulatory Guide 240 Hedge funds: Improving disclosure (RG 240), follows industry consultation earlier this year (refer: 12-30MR) and the Parliamentary Joint Committee on Corporations and Financial Services (PJC) report into the Trio collapse, and is part of ASIC's forward plan of work to improve the conduct of gatekeepers for managed investment schemes and strengthen the regulatory requirements applying to hedge funds.
In the final version of the regulatory guide, there are a number of changes made as a result of submissions received during the consultation, including:
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defining ‘hedge funds’ as managed investment schemes which exhibit at least two out of five characteristics: complex investment strategy or structure; use of leverage; use of derivatives; use of short selling; charging a performance fee
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removal of an independent custody benchmark
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simpler fee disclosure more in line with prevailing industry practice, and
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where a hedge fund has invested 35% or more of its assets in an underlying hedge fund or similar investment vehicle, the disclosure principles and benchmarks should be taken to apply to each such ‘significant underlying fund’.
‘Hedge funds, because of their diverse investment strategies and use of leverage and offshore investments, can pose more diverse and complex risks for investors than traditional managed investment schemes,’ ASIC Commissioner Greg Tanzer said.
‘Given the risks for retail investors associated with investing in hedge funds, disclosure needs to provide retail investors with all the information they require to make an informed investment decision. In some cases, this may include a decision not to invest in these products.’
Responsible entities of hedge funds should disclose against the benchmarks and apply the disclosure principles in any PDS dated on or after 22 June 2013.
Background
ASIC’s submission to the PJC inquiry into the Trio collapse set out its role and forward plan of work to help strengthen the financial system, including its activities on hedge fund disclosure.
The PJC Inquiry report into Trio was released on 16 May 2012 and made a number of recommendations on the role and work of hedge funds.
ASIC continues to conduct regular reactive and proactive surveillances to identify hedge fund manager fraud. Our proactive surveillance tools include analysing fund returns to identify outlying investment performance.