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
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