Draft directive on investing in hedge funds published

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.