South Africa: Hedge Fund Regulation Leaps Forward With The Release Of Policy Framework Document

Last Updated: 9 October 2012
Article by Johan Loubser

Most Read Contributor in South Africa, September 2016

National Treasury and the Financial Services Board released a policy document earlier this month which will have a marked impact on hedge funds and collective investment schemes. The policy document, which was released on 13 September 2012 is named "The Regulation of Hedge Funds in South Africa" and sets out a framework for the direct regulation of hedge funds in South Africa. At the moment, hedge funds are not directly regulated in South Africa, but are indirectly regulated through the regulatory oversight which the Financial Services Board exercises over hedge fund managers, prime brokers and fund administrators.

outline of proposals

Broadly speaking, the framework document makes the following key proposals:

  • hedge funds will be directly regulated as a new and separate category of collective investment scheme under the Collective Investment Schemes Control Act ("CISCA");
  • hedge funds will be categorised as either "restricted hedge funds" or "retail hedge funds". Restricted hedge funds will be subject to lighter regulatory requirements and must have a restricted investor base consisting only of "qualified investors" who invest pursuant to private arrangements. Retail hedge funds, who will be permitted to market themselves more widely, will be subject to a greater degree of regulation and will, among other things, be required to meet investor redemption requests within 14 days, publish a key investor information document ("KIID") containing short-form prescribed information aimed at assisting investors to understand the investment product, and will be subject to prescribed prudential investment requirements;
  • each hedge fund will require a collective investment scheme manager approved under CISCA; and
  • service providers to hedge funds such as prime brokers and fund administrators will be subject to specific regulatory requirements.

The framework document states that it is government's intention that the applicable regulatory changes will be introduced in two phases. The first phase, which will be an interim measure, will commence when hedge funds are declared to be collective investment schemes under section 63 of CISCA and then regulated through subordinate legislation. The second phase will commence following legislative amendments to CISCA.

framework document to be welcomed

Whereas there are many details still to be worked out, the publication of the framework document and the changes set out therein should, in our view, be welcomed for, among others, the following reasons:

  • It will promote investor choice. Having hedge funds regulated through CISCA will permit investors who have to date been wary of investing in unregulated investment structures, or who may not have known of suitable hedge funds because of restrictions on marketing, to gain exposure to alternative investment strategies through a regulated investment product which can be marketed under an established regulatory framework.
  • It will likely lead to product innovation. Having hedge funds regulated through CISCA will likely encourage further product innovation in the collective investment scheme industry through the creation of more portfolios following different investment strategies.
  • It will lower investor due diligence costs. It is likely that regulation under CISCA will lead to standardised legal structures and documentation, which will lower due diligence costs for prospective investors.
  • It permits industry participants to plan ahead. Greater certainty in relation to the likely regulatory framework will permit industry stakeholders, including investors, hedge fund managers, prime brokers, fund administrators, collective investment scheme managers and collective investment scheme trustees to plan for the impact of the regulatory changes over the medium term.
  • It will help develop regulatory capacity. Direct regulation of hedge funds will enhance regulators' knowledge and insight into the nature and use of derivatives, which knowledge and insight will be useful in related areas of regulation given the wide-spread use of derivatives in the financial services industry.
  • The role of the trustee will improve governance. Adoption of the CISCA regulatory framework will create checks and balances given the respective roles of the trustee/ custodian on the one hand and the manager of the collective investment scheme on the other. The role of the trustee/ custodian under CISCA is to verify, as an independent party, that the manager administers the relevant portfolios in compliance with CISCA and with the founding documents of the scheme. This type of oversight is not currently in place in many hedge fund structures.

various issues to consider

It is important that industry stakeholders respond to government's call for comments on the framework document by 15 November 2012. Some of the issues which will, in our view, require further consideration include the matters set out below.

  • Tax treatment: It is uncertain whether investors in the proposed hedge fund portfolios regulated under CISCA can expect the same tax treatment as investors who invest in collective investment schemes in securities. The framework document is silent on tax issues, save to say that hedge funds may be subject to separate tax treatment.
  • Insolvency: Any portfolio which makes use of leverage has an inherent risk of insolvency. It is unclear how this risk should be addressed. The framework document suggests that the hedge fund manager will have to fund any shortfalls in retail hedge funds, but it seems unrealistic for managers to have unlimited liability in circumstances where the insolvency was not caused by manager wrong-doing.
  • Prudential Investment Requirements: It will need to be considered whether the proposed prudential investment requirements for retail hedge funds are practical. For example, the suggestion in the framework document that over-the-counter derivatives must be capable of being "sold, liquidated or closed by an offsetting transaction" at fair value at the option of the hedge fund at any time may not be practical.
  • Is the name "hedge fund" still appropriate? Lastly, it needs to be considered whether it continues to make sense to refer to the applicable portfolios as "hedge funds" given that strong existing associations with this term may be misleading if the applicable investment product will be reshaped by the new regulatory framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.