Until August 2007, hedge funds were unregulated investment
vehicles providing investors with exposure to a wide range of
products including derivatives and leveraged positions. A hedge
fund is defined in the new Regulations discussed below as a
portfolio which uses any strategy or takes any position which
could result in the portfolio incurring losses greater than its
aggregate market value at any point in time. If properly run,
and if the hedge fund manager has the correct strategy, clients
can enjoy good returns, even in situations where the equity
market is falling.
In August 2007 the FSB, in cognisance of the many
inexperienced hedge fund managers operating in the South
African market, introduced Regulations under the Financial
Advisory and Intermediary Services Act, 2002 (FAIS) governing
the managers of hedge funds and funds of hedge funds.
The Regulations require all hedge fund financial services
providers to be licensed under FAIS as Category IIA FSPs. A
hedge fund financial services provider is defined as any
financial services provider that renders intermediary services
of a discretionary nature in relation to a particular hedge
fund or fund of hedge funds.
Category IIA FSPs must prove to the FSB that they have a
track record of managing particular hedge fund strategies and
are able to adequately demonstrate knowledge, skills and
competency in managing all instruments in asset classes
comprising a hedge fund portfolio.
Anyone establishing and operating a hedge fund needs to
ensure that the structure utilised is not regarded by the FSB
as an unregistered collective investment scheme in terms of the
Collective Investment Schemes Control Act, 2002 (CISCA). The
structure would generally be a collective investment scheme if
funds are raised from members of the public, pooled and
invested on the basis that the investors enjoy a proportionate
right to the pooled assets and associated returns.
To avoid onerous disclosure requirements in relation to the
offering of shares or debentures to the public as required by
the Companies Act, 1973 (Companies Act), many hedge funds use
the exemption in the Companies Act which does not require a
prospectus document if the minimum subscription for shares or
debentures in the investment vehicle by each investor is at
least R100 000.
Hedge funds should also be structured so as not to
contravene the provisions of the Banks Act, 1990 (Banks Act)
which regulates any activity that constitutes the taking of a
deposit (including the taking of money against the issue of a
debenture or note) from the general public. The Banks Act
regulations provide certain exemptions that can be usefully
implemented by hedge funds.
Hedge fund financial services providers must, according to
the Regulations, obtain a signed mandate from their client
authorising the hedge fund FSP to exercise its discretion in
terms of its client's investments. This mandate must
contain specific requirements, such as detailing the risks
associated with investing in a hedge fund and the risk
management principles which will be adopted by the hedge fund
An appropriately structured hedge fund will operate without
contravening the provisions of Acts discussed above. From 29
April 2008, any person operating as a manager of a hedge fund
or a fund of hedge funds must be licensed as described above.
The Regulations represent a means by the FSB to ensure that
hedge fund managers understand the regulatory and common law
landscape within which hedge funds operate and are regulated
and accountable in terms of FAIS.
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.
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