Proposed fund disclosure requirements for hedge funds have industry support, but experts say that the guidelines should extend to all complex investment schemes and that a better definition of what constitutes a hedge fund is required.
The Australian Securities and Investment Commission (ASIC) is currently seeking submissions on the likely compliance costs of Consultation Paper 174 ‘Hedge funds: Improving disclosure – Further consultation’, which was released last month.
While Australian Fund Monitors chief executive Chris Gosselin believes the guidelines are designed to better inform investors on the nature of complex products, he said simpler managed investment schemes (MISs) could potentially be given an advantage over hedge funds in more easily meeting their regulatory commitments.
Under the Government’s Shorter Product Disclosure Statement regime, it was announced that hedge funds would not be included in the arrangement until they could be fully considered in light of the policy intent of the regime.
Despite the shorter PDS arrangement making it less onerous for simple funds to be compliant, Gosselin concedes that ASIC’s disclosure guidelines are justified because investing in hedge funds can be high-risk ventures.
He argued, however, that the regulator has been focused too heavily on long-short products and pointed out that simple long-only products also carry with them investment risk.
"What ASIC are focused too heavily on is the Trio Capital debacle, which was the result of fraud rather than poor investment management," he said.
Zenith Investment Partners head of alternatives research Daniel Liptak agrees that all investment funds should disclose the custody of their assets.
He added that ASIC’s definition of a hedge fund is "deliberately vague" and could potentially create a "catch-all" situation in which the proposed legislation could target products that are not hedge funds.
"As per the guideline’s definition, a hedge fund is anything that is marketed as a hedge fund – effectively all a responsible entity (RE) has to do is say that it is not a hedge fund."
The uncertainty around what constitutes a hedge fund may also give rise to confusion on the part of investors, added Nikki Bentley, a partner at Henry Davis York and chair of the Alternative Investment Management Association’s Regulatory Committee.
CP 174 states that the RE should provide ‘sufficient information to explain the strategy for selecting which underlying funds they will invest in’.
Furthermore, for each material investment in an underlying fund, the RE should also ‘explain why that particular fund was selected and how it fits with the investment strategy’.
"If you’re a fund of funds you don’t want to give full transparency about the underlying managers, because all you’re doing is telling your competitors the strategy behind your fund. You can give the disclosure in general terms," Gosselin said.
The issue of intellectual property has been raised by fund managers more in relation to the disclosure of portfolio holdings of all managed investment schemes, Bentley said.
"Where there isn’t a sufficient time lag or [if disclosure] goes into minute detail, that’s where the intellectual property issue has been raised," she said.
