This year saw the first batch of hedge funds authorised in Hong Kong for sale to the general public. In November the SFC issued new guidelines on reporting requirements for hedge fund managers, as well as a circular to registered dealers and investment advisers ("Registered Persons") regarding the marketing of such funds.

Reporting requirements

In September 2002 the SFC conducted a public consultation on proposed reporting requirements for managers of hedge funds authorised for sale to the Hong Kong public. Conclusions to the consultation, together with new guidelines for minimum disclosure standards, were released in November. The latter will be incorporated into the SFC Code on Unit Trusts and Mutual Funds.

Managers of hedge funds are required to comply with content requirements in their annual, semi-annual and quarterly reports. Some of the standards in the guidelines are recommended (e.g. full disclosure of individual holdings in the scheme) whilst others are mandatory (e.g. disclosure of performance fees payable to the manager).

The guidelines came into effect on 20 December 2002.

Marketing requirements

Although the SFC has published rules for the authorisation of hedge funds for sale to the Hong Kong retail market, no specific rules have been issued for the conduct of intermediaries when marketing such funds.

Hedge funds are a type of collective investment scheme, units of which are sold to investors in the same way as other investment products. Persons who carry on a business of dealing in or advising on such investment products are required to be registered with the SFC as Registered Persons. Generally, Registered Persons are expected to meet the standards set out in the Code of Conduct for Persons Registered with the Securities and Futures Commission (the "Code of Conduct"), as would dealers and investment advisers specialising in other financial products, such as shares and debentures.

The SFC reiterated the importance of compliance with the Code of Conduct at various stages of a marketing of hedge funds. For example, the Registered Persons must have sufficient relevant information about its client, give reasonable investment advice and have in place internal controls and procedures to ensure full compliance with applicable laws and regulations.

The circular was also circulated by the HKMA to banks and financial institutions which may also engage in marketing of hedge funds in the course of their business as exempt dealers.

© Herbert Smith 2003

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