Draft di­rec­tive on in­vest­ing in hedge funds pub­lished

Weekend Argus (Saturday Edition) - - GOODPOSTER - BRUCE CAMERON

The Fi­nan­cial Ser­vices Board (FSB) has pub­lished a draft di­rec­tive set­ting out the rules and pro­ce­dures that re­tire­ment funds will have to fol­low when they in­vest in hedge funds.

In 2011, reg­u­la­tion 28 of the Pen­sion Funds Act was re­vised to al­low re­tire­ment funds to in­vest up to 10 per­cent of their as­sets in ei­ther pri­vate eq­uity funds or hedge funds, or a to­tal of 15 per­cent of their port­fo­lio if they in­vest in both.

In ad­di­tion, a re­tire­ment fund may not in­vest more than 2.5 per­cent of its as­sets in a sin­gle hedge fund or pri­vate eq­uity fund, and it may not in­vest more than five per­cent of its as­sets in a fund of hedge funds or a fund of pri­vate eq­uity funds.

How­ever, the “look-through” prin­ci­ple in reg­u­la­tion 28, in terms of which the un­der­ly­ing as­sets of an in­vest­ment must be dis­closed, does not ap­ply to hedge funds. The hedge fund it­self is re­garded as the “fi­nal” as­set.

Since 2011, hard-sell­ing con­sul­tants and fund man­agers have tried to per­suade re­tire­ment funds to di­vert their as­sets into high-cost hedge funds, many of which have a ques­tion­able track record.

Ac­cord­ing to the No­vare In­vest­ments Hedge Fund Sur­vey to June, in­vest­ments in lo­cal hedge funds jumped by R5 bil­lion over the pre­vi­ous 12 months to R40 bil­lion.

In terms of the draft di­rec­tive, which has been pub­lished for pub­lic com­ment, re­tire­ment funds may in­vest in lo­cal and for­eign hedge funds only where the hedge fund man­ager is reg­is­tered with the FSB as a fi­nan­cial ser­vices provider. Other re­quire­ments are: ◆ Be­fore in­vest­ing, and while in­vested, in a hedge fund, a re­tire­ment fund’s trustees must con­sider the hedge fund’s in­vest­ment strat­egy and ob­jec­tives, and its in­vest­ment and bor­row­ing pow­ers and the as­so­ci­ated risks, in­clud­ing the sources of lever­age (bor­row­ing to in­vest); and

◆ Re­tire­ment funds must check that a hedge fund is val­ued and au­dited reg­u­larly and in­de­pen­dently, and en­sure that a hedge fund is sol­vent.

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