ASIC draws up stricter guidelines for hedge funds

The Australian Securities and Investments Commission will force hedge fund managers from next June to be more up front about how and where they invest money, and the risks involved.

The new rules come three years after the $176 million collapse of Trio Capital, in what was the largest superannuation fraud in Australian history.

Trio invested money in two hedge funds, Astarra Strategic and ARP Growth, which then siphoned the cash to Caribbean tax havens.

The ASIC commissioner, Greg Tanzer, said the new rules had been influenced by the Trio case, as well as the watchdog's review of several hedge funds since the global financial crisis.

"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," he 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."

Hedge fund managers use higher risk investment techniques including derivatives, short selling and borrowing funds in the hope of generating a higher return for investors.

Many were caught up in the financial crisis, particularly those that owned US subprime mortgage debt and related securities.

At the heart of ASIC's new rules are plans to make the product disclosure statements of hedge funds clearer and more easy to understand for investors.

They set out nine areas for hedge funds to provide clear information on, including how its funds investment strategy works, the investment manager's experience, the fund's structure, types of assets held, how they are valued and where they are located.

The type of derivatives used by the fund, the use and risks of short selling and the ease of withdrawals will also have to be detailed.

Hedge funds will be expected to provide independent valuations of non-exchange traded assets and regular reports to investors about important basic information.

Earlier this year, a parliamentary inquiry accused corporate regulators including ASIC of failing to do enough to prosecute the people behind Trio's collapse or recover money owing to investors.