ASIC Releases Australian Hedge Funds Regulatory Guide

ASIC has released Regulatory Guide 240 – Hedge funds improving disclosure.  The 38-page guide offers benchmarks and disclosure principles related to the issue of Product Disclosure Statements (PDS).

The guide covers benchmarks for valuation of assets and periodic reporting, and disclosure principles on investment strategy, manager, fund structure, valuation/location/ custody of assets, liquidity, leverage, derivatives, short selling and withdrawals.

For the first time, the regulator has defined a ‘hedge fund’ and ‘fund-of-hedge-fund’ (via its recent ‘Class Order 12/749 – Relief from Shorter PDS’ where hedge funds are excluded from using a shorter 8-page PDS.

ASIC defines a “hedge fund” as a registered MIS that is promoted by the responsible entity as being a hedge fund (using that expression); or has two or more of the defined characteristics of a hedge fund.

These defined characteristics are:

1. the investment strategy has a low correlation to published financial market or bond indices;
2. the fund acquires financial products through three or more interposed entities within its control, or at least two, if one of the interposed entities is an offshore entity;
3. the fund uses debt (leverage) for the dominant purpose of making an investment;
4. the fund deals in derivatives for speculative purposes (i.e. not to manage a foreign exchange or interest rate risk);
5. the scheme engages in short selling strategies; or
6. the responsible entity of the fund has a right to be paid fees which are performance-based.

“Funds of hedge funds” is defined as a registered MIS that:

(a) is promoted by the responsible entity as being a ‘fund of hedge funds’ (using that expression); or

(b) invests at least 35% of its assets in one or more (i) hedge funds; or (ii) schemes that would be a hedge fund if they were a registered MIS; or

(c) is promoted by the responsible entity on the basis that its assets are invested in the way set out in (b) above.