Hedge funds have battled an image problem, most recently with the Astarra Asset Management/Trio Capital imbroglio, but now the just-released ASIC guidelines could do much to bring this prodigal sector into the mainstream.
Alternative Investment Management Association (AIMA) president Kim Ivey said the guidelines would foster transparency, but there would still be issues with changes that should trigger disclosure.
“The interpretation of what are material and not material changes is still an issue,” he said.
Overall, “it’s not about solving all the problems; it’s about making the information available”.
Another issue would be the ranges of leverage. “Leverage is dynamic,” Ivey said.
“For example, a multi-strategy fund may have different ranges for long-short, for convertible bonds, for managed futures.
“In a perverse way, the regulations will assist in bringing more assets into hedge funds. This is not being naive. There is an overlap between investors looking for alternatives to equities and cash.”
The guidelines would help because they “put the onus on the hedge fund manager to explain the fund’s place in a portfolio”, and to gather data and distribute it.
Submissions on the guidelines are due on April 19 this year, with the regulatory guide released mid-year ahead of legislation in March next year.
Ivey said Australian-based hedge funds had between $60 billion to $100 billion in funds under management, depending on the scope of the definition of a hedge fund.
The draft guidelines “are pragmatic” in that they balanced what ideally could be achieved with what could be implemented.
“The onus will be on Fund of Hedge Funds (FOHFs) to gather information from the managers and then make that available to investors,” Ivey said.
While the draft guidelines are aimed at retail investors – right down to individuals with perhaps $5,000 to invest – wholesale funds “can take some guidance from the draft”, he said.
In tandem with the ASIC work, AIMA has formed an investor advisory committee chaired by Bruce Tomlinson, SunSuper portfolio manager, and comprising funds such as MediaSuper, SunSuper and LGS NSW.
In complying with the guidelines, there would be some cost to fund of hedge funds in systematising data, and this would perhaps necessitate that one or two more people would be employed to write code and gather data.
Many institutional investors already went “directly to the underlying manager because they (the investors) have the research teams”, Ivey said.
In speaking about hedge funds’ tarnished image, Ivey said that Astarra/Trio – part of which was a hedge fund – was a “scam from the beginning”.
This kind of activity could only occur “if there is collusion between, say, the manager, and the administrator”.
That said, Ivey conceded that ASIC deputy chair Belinda Gibson’s recent comments about hedge funds related to how hedge funds behaved and “hedge funds were littered with aggressive, determined people”.
“It comes down to the issue of collusion … and inside information,” he said.
If it happens he said: “we fully support that ASIC should prosecute to the full extent of the law”.
AIMA had worked with ASIC for the past year on the draft disclosure guidelines in conjunction with the Financial Services Council, two lawyers, and two hedge fund representatives. AIMA has 65 corporate members in Australia.
Hedge funds have to deal with both ASIC and Australian Prudential Regulation Authority (APRA), the “twin peaks of regulation”, Ivey said.
APRA had powers that ASIC did not have due to APRA’s “prudential overview … of boards of trustees”.
Super funds already gather a lot of information in private meetings with fund managers, so why not make that available to investors, he said.
“Advisers may say ‘my clients won’t understand’ but the onus will be on the fund manager to make it intelligible,” he added.
