Johannesburg - In-depth draft regulations to expand the scope of oversight over hedge funds were released for public comment by the Treasury and Financial Services Board (FSB) last week.

The Treasury and the FSB said South Africa, as a committed member of the Group of 20 (G20), had embarked on this process following the global financial crisis in 2008. This had culminated in the release for public comment in September 2012 of the proposed framework for regulating hedge funds in the country.

In the statement, they said: “The extensive comments received from industry participants, industry bodies, regulatory bodies and other interested parties were carefully considered by the Treasury and the FSB, and laid a good foundation for these regulations. Industry participants and bodies were also invited to provide input during the regulations drafting process.”

The Treasury and the FSB said the intention was to finalise the regulations by the second quarter of this year.

However, this would depend on the nature and extent of the comments received, which could necessitate delay of the finalisation of the regulations until the third quarter.

Hedge funds suffered significant withdrawals in 2008 and many funds in South Africa had closed down or suffered significant withdrawals, Evan Jones, one of the four founders of Cadiz Asset Management, commented on the comments and response document released by the Treasury and the FSB in February.

He said: “Furthermore, due to limited regulatory oversight and lack of inclusion in retirement fund legislation, domestic hedge funds received limited support from the domestic retirement industry.

“Currently, the hedge fund industry in South Africa is estimated at R31 billion as compared against $2 trillion (R21 trillion) globally.”

The regulations want to establish the categories of qualified investor hedge funds and retail hedge funds. Only qualified investors would be allowed to invest in the former, while any investor could invest in a retail hedge fund.

They would both fall under the existing Collective Investment Schemes Control Act (Cisca) and be regulated under the Financial Advisory and Intermediary Services (Fais) Act administered by the FSB.

Shayne Krige, a director at Werksmans Attorneys, said while the industry had welcomed the draft regulations, there was some controversy over the reasons given by the Treasury for giving priority to the regulation of hedge funds.

He said: “This not to say that the industry seeks to avoid regulation or that somewhere down the line the hedge fund industry may not grow and pose a systemic risk, but it is unclear why hedge fund regulation is being prioritised over redrafting of Fais and Cisca, finalisation of regulation 28, the completion of the investment management exemption and addressing of more systemic risks elsewhere in the system.”

Krige said the G20 obligations were not entirely accurately summarised in the explanatory documents to the draft regulations.

The G20 does not view South African hedge funds as posing a systemic risk. Its report on South Africa specifically notes that the hedge fund industry is small “and so there are no systemic risk issues”.

He said there appeared to be a number of conceptual issues with the regulations, such as:

n Inconsistencies in the approach to regulation of hedge funds by comparison with other collective investment schemes. Other schemes were regulated on the basis of assets that they invested in whereas hedge funds were regulated on the basis of how they invested (their investment strategy);

n A hedge fund was defined in the draft regulations in such a way that it was possible for any fund that borrowed to be defined as a hedge fund even if the borrowing was for reasons that had nothing to do with hedging.