The document outlines a new regulatory framework for hedge funds, emphasizing investor protection, risk management, and transparency. It distinguishes between restricted and retail hedge funds, detailing their respective legal structures, registration requirements, and investment activities. Additionally, it highlights compliance necessities for managers, prime brokers, and administrators to ensure effective oversight and minimize systemic risks.

1. NEW HEDGE FUND FRAMEWORK
Study Notes

2. 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

3. 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

4. OBJECTIVES
 greater investor protection
 prevention of systemic risk
 promotion of market integrity
 transparency

5. 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

6. 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

7. 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.

8. 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;

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. 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.

21. 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.

22. 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

23. 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

24. 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

25. 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

26. 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

27. CONCLUSION
 The framework is not perfect
 Intention is to protect stakeholders
 May be reviewed in future