Member Article

The Securities and Futures Commission (SFC) proposes to amend Chapter 8.7 of the Code of Unit Trusts and Mutual Funds (Code). To date, a total of 13 hedge funds have been authorised by the SFC pursuant to the existing hedge fund guidelines. The SFC has indicated that some applications for authorisation have failed because of the failure of the applicant hedge fund manager to comply with the experience requirements. The revised Chapter 8.7 of the Code aims to provide for a more principle based, holistic approach in assessing hedge funds for authorisation. It will clarify the SFC’s existing practices in relation to the authorisation of hedge funds and provide additional guidance as to how the guidelines will be applied in practice. A wider range of hedge fund experience will be acceptable to the SFC when assessing compliance of the personnel of the investment manager with the requirement for five years relevant experience. Greater emphasis will be placed on proper internal controls, risk management processes, human and technical resources, public funds management experience and good corporate governance. There will be a requirement for an increased level of disclosure in hedge fund offering documents on the operations of the management company and on the relationship of a hedge fund with its prime broker, and (in the case of a fund of hedge funds) on the monitoring by the investment manager of the investment managers of underlying funds. Valuation agents will be required to be independent of managers. The SFC is seeking views on whether to reduce the minimum investment requirement for single strategy hedge funds from US$50,000 to US$30,000. The SFC also is considering permitting an increase in the value of the assets of a hedge fund that may be charged to the prime broker of a hedge fund. Additional provisions will be inserted reflecting current SFC policies on compulsory redemption, asset ring-fencing, equalisation and prohibitions on the use of managed accounts by funds of funds.