The regulation of South Africa’s R46-billion hedge fund industry moved a step closer this week with the publication, for comment, of draft regulations that will apply to these funds once they fall under the Collective Investment Schemes Control Act (Cisca).
Proposals to regulate hedge funds under Cisca were released in 2012. The draft regulations are largely in line with the proposals.
Jurgen Boyd, the deputy executive officer for collective investments at the Financial Services Board, says the FSB hopes to issue the regulations in June or during the third quarter of this year. This will coincide with the Minister of Finance declaring that hedge funds are collective investments under Cisca, Olano Makhubela, the chief director of savings at National Treasury, says.
Hedge funds are currently unregulated, apart from a requirement in the Financial Advisory and Intermediary Services Act that the managers of these funds obtain an appropriate financial services provider licence.
Your retirement fund is permitted to invest up to 10 percent of its assets in a hedge fund.
Hedge funds use high-risk strategies to target positive returns regardless of how financial markets perform. They use practices such as short-selling (profiting from securities that are falling in price) and leveraging (borrowing to invest), often by way of derivatives. They also have high costs and charge performance fees.
The draft regulations propose that hedge funds be classified as qualified investor hedge funds or retail investor hedge funds.
Retail investor hedge funds will be available to anyone, whereas qualified investor funds will be offered only to investors with R1 million to invest and who have, or who have an adviser with, the knowledge and experience to assess the merits and risks of these funds.
The regulations propose that a retail investor hedge fund can be offered only by a company with an independent trustee who can oversee the daily pricing of the fund and ensure that it complies with its mandate and the regulations.
A qualified investor hedge fund can be offered by a company, trust or partnership, and will have to appoint either a trustee or an independent administrator to oversee the fund.
Both kinds of funds will be able to use leveraging, but the most you may lose is the original capital invested. The draft regulations propose retail investor hedge funds be limited to borrowing up to double your investment or 20 percent of the value of the fund that is at risk.
Retail funds will be required to pay out your investment within 30 days, and qualified investor funds within 90 days. The draft regulations limit to 30 percent a hedge fund’s exposure to over-the-counter derivatives issued by a single party, unless the derivative is issued by a bank, in which case the fund can have 100 percent in that bank’s derivatives.