Complex transition for an industry
The transition of hedge funds from the unregulated to regulated space was an enormous undertaking. Within 18 months, close to 300 individual portfolios have been registered and approved by the Financial Services Board (FSB), writes Johann Barnard.
According to figures from the regulator, the first tranche of funds was approved in November 2015 and the launch was early last year.
Following the initial tranche of approvals, manco and portfolio approvals picked up from April last year through to September, by which time the number of approved funds had grown to around 270 portfolios.
Graeme Rate, head of hedge funds at Sanne Group, a global provider of administrative and management company (manco) services to the industry, says it is still early days for mancos, investment managers and administrators in the new, regulated environment.
“We’ve seen a relatively muted appetite from investors that haven’t been invested in the hedge fund space prior to regulation,” he says.
“Investment managers are seeing the move into the regulated space has come with an additional cost component in terms of regulatory compliance. There has also been a lack of clarity around certain issues, such as TER [total expense ratio] and TC [total cost] reporting.
“There are a number of issues that still need to be worked through . . . but in a fledgling environment these issues take time to iron out.”
These types of teething problems are inevitable, particularly for investment products that can be complex and that for many years have operated in an unregulated environment.
Some of the changes, for example, relate to management and governance practices as well as the way funds were structured.
Rate says these changes are all positive for the industry and that an untapped market is now available to investment managers that have previously worked in a rather restricted market.
“What we’ve been undertaking as a manco is interacting with the broader investment market, such as with Lisps [linked investment service providers], to understand the implications and their requirements for portfolios to be hosted on their platforms and what we as an industry need to deliver to achieve this.”
Graeme Rate … still early days