ASIC draws up stricter guidelines for hedge funds

INVESTORS dabbling with high-risk hedge funds should be better protected from losing their money under new rules drawn up by the corporate watchdog.

By InvestSMART · 19 Sep 2012

By InvestSMART ·
19 Sep 2012

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INVESTORS dabbling with high-risk hedge funds should be better protected from losing their money under new rules drawn up by the corporate watchdog.

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.

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Frequently Asked Questions about this Article…

What are ASIC's new rules for hedge funds and when do they take effect?

ASIC has drawn up stricter rules that will require hedge fund managers to be more upfront about how and where they invest money and the risks involved. According to the article, these rules are due to start from next June and are designed to improve disclosure to investors.

Why did ASIC introduce stricter hedge fund disclosure guidelines?

The new guidelines were influenced by the $176 million collapse of Trio Capital and ASIC’s review of several hedge funds since the global financial crisis. ASIC says the changes respond to the complex and diverse risks hedge funds can pose for investors.

How will the ASIC rules protect retail investors in hedge funds?

The rules aim to give retail investors clearer, easier-to-understand product disclosure statements (PDS) and regular reports. That information should help investors understand fund strategies, risks such as leverage and offshore investments, and make an informed decision — including deciding not to invest if the product isn’t suitable.

What specific information must hedge funds disclose under the new ASIC guidelines?

ASIC expects hedge funds to disclose nine key areas, including how the fund’s investment strategy works, the investment manager’s experience, the fund’s structure, types of assets held, where assets are located, how assets are valued, the type of derivatives used, the use and risks of short selling, and the ease of withdrawals.

What does ASIC require for valuing non-exchange traded assets in hedge funds?

Hedge funds will be expected to provide independent valuations for non-exchange traded assets and give investors regular reports with important basic information about those valuations and holdings.

How do hedge fund risks differ from traditional managed investment schemes?

The article explains hedge funds often use diverse strategies such as derivatives, short selling and borrowing (leverage) and may invest offshore. Those features can create more diverse and complex risks than traditional managed investment schemes, and some hedge funds were heavily affected by the global financial crisis.

Will the new ASIC rules prevent frauds like the Trio Capital collapse?

The rules are intended to improve transparency and investor protection by increasing disclosure, and they were influenced by the Trio Capital case. The article also notes a parliamentary inquiry that accused regulators of not doing enough to prosecute those behind Trio or recover investor losses, so while better disclosure helps, it doesn’t guarantee fraud will be prevented or that past losses can be recovered.

What should everyday investors check in a hedge fund product disclosure statement under the new rules?

Everyday investors should look for clear details on the fund’s investment strategy, the manager’s experience, types and locations of assets, how assets are valued (including independent valuations for non-exchange assets), use of derivatives and short selling, fees and the ease of withdrawals, plus regular reporting — all items ASIC now expects to be disclosed so investors can make informed choices.