APRA hedging on hedge funds

At the same time as regulators in the US and Europe have moved to intensify their scrutiny on hedge funds, Australia’s major prudential regulator has admitted it does not possess clear details about the degree to which superannuation funds are exposed to hedge funds.

The Australian Prudential Regulation Authority (APRA) has admitted to a Parliamentary Committee that it has not specifically defined what constitutes a hedge fund investment and therefore cannot determine with certainty the level of exposure of individual funds.

Addressing the Senate Economic Committee, APRA executive general manager Keith Chapman said the question of determining the level of exposure to hedge funds had been an issue for debate within the regulator for many years.

"One of the difficulties we have always had with hedge funds is how you define them," he said. "For part of our data collection on super we have a category called ‘other’."

However Chapman admitted that the ‘other’ category "might in many cases include hedge funds, but some of them may also be in listed equities. Some hedge funds are listed".

He said that APRA did not believe the overall level of exposure to ‘other’ was very high.

"When we do individual fund reviews and examinations we look at what their investment portfolios are … but I am not aware of any significant number of superannuation funds that we believe have a significant exposure to hedge funds," Chapman said.

While noting that APRA had "one example which has failed where there was a lot invested in hedge funds", Chapman said that across the board APRA was not seeing significant hedge fund investment.

He said he would view a significant exposure as being something above 5 per cent.

"But I think we also need to look at this issue from the perspective of: what is a significant exposure for a fund versus what is a significant exposure for an investment option," Chapman said.

He said APRA’s policy over many years had been to allow investment choice, "and we do not collect superannuation investment option level data at this stage".

"One of our proposals is to do so in the future. That is something we are very keen to do. The Cooper Review has this as part of their examination. We have slowed our process down to see what comes out of Cooper. Subject to Cooper not recommending otherwise and the Government not deciding otherwise, we would definitely be intending to expand our superannuation data collection to include investment option level, because that is where it starts to become an issue."