Regulations under the Collective Investment Schemes Control Act (CISCA) protect you as a hedge fund investor by ensuring asset managers are properly qualified, funds’ investment risks are monitored, funds are transparent, pricing is done regularly and costs are disclosed.
The investment risks that retail investor hedge funds can take are more strictly controlled than those a qualified investor hedge fund can take.
These measures offer you good protection, but it does not mean that a hedge fund cannot still incur large losses if its investment strategies fail.
Since 2007, South African hedge fund asset managers have had to meet certain requirements set by the financial services regulator, the Financial Sector Conduct Authority (FSCA).
Managers need to have a licence under the Financial Advisory and Intermediary Services Act (known as a category IIA licence), which ensures they have the required level of competence and experience to manage money as well as certain qualities such as honesty and integrity.
While hedge fund asset managers have been regulated since 2007, the hedge funds themselves were not regulated until April 2015 when they were declared collective investment schemes.
New South African hedge funds were required to register as collective investment schemes with the financial services regulator, the Financial Sector Conduct Authority, as of March 2016 and existing funds had to register from March 2017.
Hedge fund requirements
Registering as a collective investment scheme means a hedge fund must:
Submit the fund mandate to the FSCA for approval before launching a fund and submit to ongoing supervision by the regulator.
Appoint an independent trustee – usually a bank – as well as an independent custodian which holds the fund’s assets (the shares, bonds, cash or derivatives) and protects the holdings if the manager has financial problems. Hedge funds typically appoint an FSCA-approved prime broker which clears and settles the short-selling and gearing transactions that the funds engage in. The prime broker is also often the fund’s custodian.
Either have a trust structure like other unit trust funds (the most commonly-used option), or a partnership (known as an “en commandite” partnership) between the management company and the investors as provided for in the regulations. In this partnership the management company assumes full legal liability and the investors enjoy limited liability.
Operate, or appoint, a management company (known as a manco) approved by the FSCA to take care of all administrative, operational and risk monitoring duties.
Have a risk management policy to test and manage the risks to the fund and the hedge fund company. This policy must ensure the fund is sufficiently liquid to pay you out, not too heavily exposed to defaults (credit risk) in the instruments in which it invests and that the fund complies with the limits on exposure to, for example, leveraging. The management company must appoint a risk manager and there must be an independent risk manager monitoring the way risks are managed.
The management company must act as a compliance officer and check that the fund complies with the law.
Report fees as total expense ratios.
Disclose the portfolio holdings regularly.
Understanding required
As regulations can’t protect you from everything, to minimise your risk further you, or your adviser need a good understanding of:
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TAKE NOTE 
Hedge funds registered in other countries may not be regulated in the same way as South African hedge funds. It is possible that an offshore hedge fund will not limit your losses only to what you have invested. If an offshore hedge fund wants to market in South Africa, it has to register with the financial services regulator, the Financial Sector Conduct Authority (FSCA), and comply with the hedge fund regulations under the Collective Investment Schemes Control Act, as well as the section of the Act that deals with offshore funds registering in South Africa. You are, however, free to invest directly in any offshore hedge fund – registered or not - using your foreign currency allowances. Remember funds that are not registered with the FSCA do not have to have a contact person in South Africa. Contacting a manager in a foreign country with your administrative problems can be difficult. Read more on How can I invest safely offshore? |
