On 3 October 2013 Australian Securities and Investments Commission (ASIC) released final guidance notes which, amongst other things, refined the definition of a ‘hedge fund’ to ensure such disclosure requirements are appropriately targeted at those funds that pose more complex risks to investors.
Following extensive consultation with industry since 2012, Class Order [CO 13/1128] Amendment of Class Order [CO 12/749] and an updated Regulatory Guide 240 Hedge funds: Improving disclosure (RG 240), make changes to the characteristics that require a registered managed investment scheme to be classified as a hedge fund.
ASIC Commissioner Greg Tanzer has stated in relation to the further guidance, “Our changes will benefit the industry by relieving some lower-risk funds from the more extensive disclosure obligations imposed on a hedge fund.”
ASIC’s disclosure requirements for hedge funds commence from 1 February 2014.
After extensive consultation with the industry, ASIC has modified its definition of a hedge fund, to reduce the number of products that fall within the strict category requirements.
Product providers had previously expressed strong concern that some low-risk retail products which use complex instruments to reduce volatility, may have fallen within the definition of a hedge fund. This would increase the reporting burden on the product provider and also limit the degree to which these products could be marketed to retail investors.
A “hedge fund” is defined in Class Order [CO 12/749] as a registered managed investment scheme which:
a) is promoted by the responsible entity using the expression as being a “hedge fund”; or
b) satisfies two or more of the following tests:
- use of investment strategies intended to generate returns with low correlation to certain published indices (i.e. ‘complexity of investment strategy’) and/or use of complex investment structures (i.e. ‘complexity of investment structure’);
- use of debt for the dominant purpose of making a financial investment;
- use of derivatives (subject to limited carve-outs); use of short selling; and
- ability to charge a performance fee.
This class order will assist industry by expanding some of the existing carve-outs and providing greater clarity about the operation of some of the characteristics in the definition. An anti-avoidance clause has been inserted to ensure that responsible entities do not structure schemes with the sole or dominant purpose of avoiding those schemes being characterised as hedge funds.
The class order, whilst not impacting on the administration of the fund and its operations, will have impact for the marketing of such funds and the drafting of product disclosure statements (PDSs).
OPERATION OF THE CLASS ORDER*
The class order:
- clarifies that a scheme which pursues a balanced strategy correlated to an index over one or more of the prescribed asset classes will not trigger the complexity of investment strategy limb and expands the types of published indices;
- amends the complexity of investment structure limb to exclude registered schemes and certain foreign schemes from being counted as interposed entities;
- clarifies that derivatives with an expiry date of more than 28 days can still come within the derivatives carve-out for managing financial risk for a period of less than 28 days provided they are closed out within the 28 day timeframe;
- defines “derivatives” to specifically include deferred purchase agreements; inserts an additional carve-out to the derivatives limb which allows a scheme to have up to 10% of its net asset value in exchange traded derivatives for any purpose;
- clarifies that where the derivatives limb is triggered and the use of derivatives also triggers the leverage or short selling limbs, then it will only be taken to trigger the derivatives limb and should not be double counted;
- amends the performance fee limb so that it is only triggered where there is a right to a performance fee and the responsible entity discloses to investors that performance fees will be payable in the event the responsible entity or another person satisfy certain criteria related to the performance of the scheme property; and
- inserts an anti-avoidance provision to ensure that responsible entities do not structure schemes with the sole or dominant purpose of ensuring that the scheme does not trigger two or more of the hedge fund limbs.
The class order contains a transitional provision which allows the responsible entity of a simple managed investment scheme:
- that was either a hedge fund or fund-of-hedge fund immediately before the commencement of this class order; and
- is no longer a hedge fund or fund-of-hedge fund following the amendments made by this class order; and
- in relation to which a PDS was in use immediately before the commencement of this class order;
to continue using that PDS until 1 February 2014.
If the fund meets (or continues to meet) the definition:
- if a short PDS is currently being used for the fund (because the fund was previously thought to be outside the definition), a long PDS must be in place by 1 February 2014 and the PDS must satisfy the RG240 enhanced disclosure requirements.
- if a long PDS is currently being used for the fund, the responsible entity must consider the extent to which it needs to meet its enhanced disclosure requirements under RG240 from 1 February 2014.
- if the fund no longer meets the definition and is using a short or long PDS, the responsible entity should consider the application of the shorter PDS regime to the fund and ensure compliance from 1 February 2014.
*See Explanatory Statement on ASIC Class Order [CO 13/1128]