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New Proposed Hedge Fund Framework

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This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments" ...

This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments"

These notes focus on the new proposed Hedge Fund framework in South Africa and its Impact on the Hedge Fund Industry.

http://www.hedgefund-sa.co.za/new-proposed-framework

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    New Proposed Hedge Fund Framework New Proposed Hedge Fund Framework Presentation Transcript

    • NEW HEDGE FUND FRAMEWORK Study Notes
    • OVERVIEW  Introduction  Legal structure  Registration  Risk Management  Transparency and Disclosure  Prime broker and administrators  Investment/trading activities for retail hedge funds  Investment parameters for retail hedge funds
    • INTRODUCTION  Framework for the regulation and supervision of hedge funds  Intention is not to regulate hedge fund service providers  Recognition of hedge funds as a special collective investment scheme  Amendment of the current Collective Investment Schemes Act 2002 (The Act) required
    • OBJECTIVES  greater investor protection  prevention of systemic risk  promotion of market integrity  transparency
    • RESTRICTED VS. RETAIL HEDGE FUNDS  Restricted Hedge Funds  not subject to strict regulation  limited to private membership of qualified investors  must register as restricted funds as per Registrar requirements and lodge returns annually  certain disclosure requirements  Retail Hedge Funds  Subject to more regulation  Investments available for retail investors as well as institutional investors  Minimum investment between R50 000 and R100 000
    • LEGAL STRUCTURE  Hedge fund service providers investment vehicles include  Trusts  Debentures  Companies  Partnership arrangements  Partnerships arrangements are the most common especially as en commandite partnerships  The Act requires the manager to be a company registered as per Companies legislation and fulfill obligations of the prescribed in the Act
    • REGISTRATION  All hedge fund managers targeting investors in SA must be registered with the Registrar  Currently registered category IIA financial services providers must register as collective investment scheme managers for the hedge funds they currently manage.
    • REGISTRATION ADDITIONAL INFO  Description of manager seeking registration  Current tax clearance certificate for all proposed shareholders  5.3.1. a description of the manager seeking registration as well as an organogram indicating the group structure and ownership of the company;  5.3.2. a current tax clearance certificate in respect of all of the proposed shareholders (direct and indirect) of the proposed manager;  5.3.3. full particulars of the collective investment scheme the manager proposes to carry on and the manner in which it proposes to carry on such scheme;  5.3.4. an indication of the manager's existing and proposed client base and an indication of the target market;  5.3.5. a business plan on how the marketing of the proposed scheme will be done;  5.3.6. the business objectives of the proposed scheme including the intended strategies to achieve these objectives and the different phases of achieving such objectives;  5.3.7. the names and physical addresses of the chairperson, directors and managing director of the manager together with their curriculum vitae;
    • RISK MANAGEMENT  Prudential requirements (retail hedge funds)  Managers must carry out duties in a prudent manner reflecting risks they take  Minimum capital requirements as determined by the registrar  Investors may not lose more than capital invested  Valuation  Assets in hedge fund valued by an independent party  Retail hedge funds must provide daily pricing  Listed investment priced according to the market price  Unlisted investment priced using method permitted by trustee or trustee’s representative
    • RISK MANAGEMENT  Liquidity  14 day liquidity requirement for retail hedge funds  Provisions made in the event that payments cannot be made when needed  Segregation  Separation of assets of the fund and of the manager  Collateral held not included in the value of the fund  Conflict of interest  Assessed and managed  Any potential conflict of interest fully disclosed
    • RISK MANAGEMENT  Risk management programme  Types of derivatives used must set out  Risks associated with derivatives  How risks will be managed  Detailed report of trading process and personnel involved responsibilities and expertise  Auditor must be appointed for the fund  All funds must appoint a compliance officer who is suitably qualified and experienced
    • RISK MANAGEMENT  Leverage  “Leverage is the use of financial instruments or borrowed capital to increase the potential return of an investment.”  May be achieved by using derivatives or borrowing  Derivative total exposure at most total net portfolio value for retail HF  Investment strategy determines rules for measuring exposure  Commitment approach used for measuring exposure for simple strategies  Counterparty risk exposure must be at most 20% of fund net asset value  VaR recommended for measuring exposure for complex strategies  Absolute or relative VaR may be used
    • TRANSPARENCY AND DISCLOSURE  All hedge funds must provide information to investors about  valuation method  position  leverage exposure for transparency purposes.  Managers must meet disclosure requirements (section 3 and 100 of the Act)  Key investor information document (“KIID”) must be prepared by manager.  The KIID must contain key investor information and may aid retail investors in understanding the investment product on offer
    • TRANSPARENCY AND DISCLOSURE The KIID must incorporate:  investment policy and objectives  description of main categories of eligible financial instruments, details on focus areas  risk and reward indicator showing risk levels from lowest to highest, and risk explanation  Charging structure presentation should be clear  Past performance presentation  All other practical information
    • REPORTING Submissions to the Registrar  Monthly reports on assets, positions and leverage by managers  Quarterly reports on holdings and exposure for retail hedge funds  Yearly reports all hedge funds
    • PRIME BROKERS  “Prime broker” means a bank as defined in the Banks Act, 1990 or an authorised financial services provider offering prime brokerage services which include lending money, acting as counterparty to finance or execute transactions in financial instruments, lending securities for the purpose of short selling, clearing and settlement of trades, operational support facilities and customised technology.
    • PRIME BROKERS Services provided  Making transactions on behalf of the fund  Margin deposit transactions  Providing credit facilities when needed  Securities lending and borrowing  Share repurchase transactions Fund assets may be used as security for debt of the fund
    • PRIME BROKERS  Subject to regulation and supervision  Only registered banks and financial service providers may act as prime brokers  Must not be trustees to the fund  Must have proper risk management in place  Managers must follow certain criteria in selecting prime brokers
    • ADMINISTRATORS  Separate from hedge fund managers  Avoid conflict of interest  Reside in the republic and registered as a financial service providers  Any contribution by manager to valuation or pricing process must be disclosed to the trustee
    • INVESTMENT/TRADING ACTIVITIES FOR RETAIL HEDGE FUNDS  Allowed assets for retail hedge funds  Securities and money markets instruments traded on a regulated market or listed on an exchange  Over the Counter derivatives and participatory interests.  The following criteria must be met:  Loss must be limited to the original investment  The liquidity of the instruments or securities must be such that the hedge fund can meet its repurchase obligations  A reliable valuation for the investment must exist.  Appropriate information on the investment must be available.  The instrument must be negotiable.  The acquisition of the investment must be consistent with the investment policy of the hedge fund.
    • INVESTMENT/TRADING ACTIVITIES FOR RETAIL HEDGE FUNDS  Risk management process of hedge fund must capture risks associated with the hedge fund.  A security or money market instrument may embed a derivative, if it meets certain criteria:  for securities or money market instruments embedding a derivative, the underlying assets of the embedded derivative instrument must be made up of eligible assets.  Participatory interests of registered collective investment schemes, closed or open ended.
    • INVESTMENT/TRADING ACTIVITIES FOR RETAIL HEDGE FUNDS  Eligible financial indices must be  sufficiently diversified  adequate benchmark of the market it refers to  published appropriately  Indices may be metal, equity or property  Exposure to indices may be obtained using swaps
    • Financial Derivative Instruments  Eligible assets  If a derivatives makes use of an ineligible asset it is ineligible  May be over the counter derivatives  Subject to SARB supervision  May be subject to valuation regularly  May be sold for their fair value
    • NON- PERMITTED ASSET CLASSES  Direct or indirect investment in  Commodities,  Property / Real Estate; and  Private Equity.  Non-Financial Indices  Hedge funds may be exempted subject to certain
    • INVESTMENT PARAMETERS FOR RETAIL HEDGE FUNDS  Equity Securities subject to limits  Derivatives  Leverage  Collateral re-use with restrictions  Investments in other Collective Investment Schemes (“CISs”)  Due diligence  Suitability  Limits for investments  10% NAV investment in unlisted securities
    • SHORT SELLING  Selling of a security that the seller does not own  Physical short selling allowed if it meets the following criteria  Economically appropriate  Realised in a cost-effective manner  Done for at least one of the following reasons  Risk reduction  Cost reduction  Generation of additional income or capital for the fund  Captured by the risk management process  No naked short selling is allowed
    • CONCLUSION  The framework is not perfect  Intention is to protect stakeholders  May be reviewed in future