ASIC consults on hedge fund disclosure

hedge funds ASIC australian securities and investments commission retail investors chairman investment manager

24 February 2012
| By Chris Kennedy |
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The Australian Securities and Investments Commission (ASIC) has released for consultation new draft guidelines for hedge funds featuring improved disclosure benchmarks and principles.

The move was prompted by experiences of investors not understanding the risks when purchasing a hedge fund product due to inadequate disclosure, according to ASIC chairman Greg Medcraft.

"Improved disclosure of the risks associated with hedge funds is particularly important because hedge funds can pose more diverse and complex risks for investors than traditional funds due to their various investment strategies, complicated structures and use of leverage, short selling and derivatives," he said.

The new principles contained in 'Consultation Paper 174 Hedge funds: Improving disclosure - Further consultation (CP 174)', cover a range of disclosures relating to the responsible entity, the individuals making the investment decisions for the fund, service providers, fund strategies and fund assets, ASIC stated.

Where a hedge fund has invested 25 per cent or more of its assets in an underlying hedge fund or structured product, the disclosure principles and benchmarks should be taken to apply to each such underlying fund or structured product, according to the guidance.

ASIC also proposed hedge funds should address benchmarks in disclosures to retail investors, on an 'if not, why not' basis, relating to the valuation and custody of assets and periodic reporting, explaining how they will deal with the business factor or the issue underlying the benchmark if they do not meet it.

Hedge funds should also provide disclosure to retail investors around the fund's investment strategy, investment manager, fund structure, valuation, liquidity, leverage, withdrawals, and use of derivatives and structured products and short selling, ASIC stated.

In terms of regulatory and financial impact, ASIC said the draft guidelines should strike a balance between preventing the mis-selling of hedge funds to retail investors and not unduly interfering with the marketing and sale of financial products. 

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