Hedge fund legislation good news for local admin industry

Following the news that hedge fund managers will now be registered as a specific category of investment managers, it is possible that the Financial Services Board (FSB) will move the spotlight to related parties such as third-party administrators of hedge funds.

Professional services firm Maitland suggests that a progressive regulatory framework for hedge fund administration would go a long way to making South Africa a preferred centre of hedge fund administration, boosting foreign investment.

Dale Lippstreu, MD of Maitlands fund services division, says the regulation of hedge funds around the world presents challenges and the FSB's start is to be welcomed.

The FSB could go further, however as there are convincing reasons why service providers to hedge funds should be regulated: "Hedge fund managers typically choose to remain small businesses without the resources to manage administration, compliance and risk. By outsourcing to proven administrators, they convey operational competence and credibility.

"Independent valuation and reconciliations for hedge fund portfolios is a hot topic internationally. By outsourcing these important functions to experts, the hedge fund manager automatically improves its transparency and credibility, affording greater protection to the end investor," Lippstreu says.

He says Maitland sees the regulation of hedge fund managers as part of the "growing up process" for hedge funds as institutional and retail interest grows.  He suggests that administrators to hedge funds should logically also be brought into the regulatory framework as this would "add materially to the protection of end investors."

Commenting on the potential for South Africa to become a preferred centre for hedge fund administration, Lippstreu cites the example of Luxembourg which has grown in popularity because the local regulator has promoted and been at the fore of the new UCITS 3 regulations in that jurisdiction.*)

Maitland is one of a handful of third-party administrators in South Africa that offer international hedge fund administration and was the first to offer offshore hedge fund administration from South Africa.  Maitland has over R272 billion of assets under administration, including some 100 hedge funds and fund of hedge funds.

If they were licensed, third-party administrators of hedge funds would need to provide improved risk and mandate compliance reporting and demonstrate operational competence.

*) Undertakings for Collective Investment in Transferable Securities (UCITs,) are a set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. In practice many EU member nations have imposed additional regulatory requirements that have impeded free operation with the effect of protecting local asset managers.