Member Article

Following certain onsite inspections, the Hong Kong Securities and Futures Commission (SFC) issued a Circular in October 2008 setting out various standards of conduct and control procedures that the SFC views as being "generally expected" of a Hong Kong-licensed hedge fund manager (HKHFM).

A summary of such standards and procedures is set out below:

• the risk management systems of HKHFMs should be commensurate with the complexity of their investment strategies;


• HKHFMs should critically review existing risk management policies and procedures given the current severe market conditions;


• where it is not practical to appoint an independent risk manager, internal controls should be implemented to compensate;


• HKHFMs are reminded that the financial statements prepared for their managed funds are required under the International Financial Reporting Standard / Hong Kong Financial Reporting Standard to disclose their use of financial risk management tools;


• HKHFMs should take all reasonable steps to ensure that information disclosed to investors is accurate and not misleading;


• it is good practice to disclose the material terms of side letters to all investors;
  all information which gives rise to actual or potential conflicts of interest should be disclosed to the HKHFM's ultimate clients and all reasonable steps should be taken to ensure their fair treatment;


• before introducing "side pockets"', HKHFMs should critically assess certain factors (such as their operational capacity). The material terms of "side pockets" should be disclosed to all investors;


• HKHFMs should plan ahead to ensure that they have the resources, structure, systems and controls that are commensurate with their business needs;


• smaller HKHFMs should implement proper checks and balances to compensate for their limited resources; and


• HKHFMs are reminded to report the value of their managed assets in their financial returns.