Hedge funds near the end of a long road to product regulation
21 February 2014 | Investments | General | Francois Cilliers, Novare Investments
The proposal by the National Treasury to include hedge funds under the existing Collective Investment Schemes Control Act (CISCA) is encouraging and will bring to a close a long period of regulatory uncertainty for hedge funds in South Africa.
Novare Investments, an independent fund manager specialising in multi-manager and alternative investment solutions, has welcomed the Treasury’s recent announcement regarding hedge fund product regulation.
Hedge fund managers have long been regulated under the Financial Advisory and Intermediary Services (FAIS) Act.
Francois Cilliers, Chief Investment Officer at Novare Investments commented: "Overall we view Treasury’s release and the ongoing commitment to dealing with some of the finer details required to help finalise hedge fund product regulation in a very positive light.
"There will invariably be a few practical points around the implementation which still need to be clarified or refined. However, as far as the formal inclusion of hedge funds within the CIS mainstay is concerned, this is very encouraging. We are heartened by the transparency of the process at the end of a long period of regulatory uncertainty for hedge funds in South Africa.
"The work may be far from over, but this is a promising push in the right direction. Hedge funds as a strategy are set to become more mainstream and accessible to investors.”
Eugene Visagie, Portfolio Manager at Novare Investments, added that the new legislation governing hedge funds was likely to trigger inflows from retail investors attracted by the reassurance of buying regulated products.
He said that due to its well established long-only collective investments industry, South African markets benefitted from sufficient size, depth and liquidity to support the efficient operation of hedge funds.
The process to expand the scope of oversight over hedge funds resulted in the National Treasury and Financial Services Board (FSB) proposing in 2012 that the regulatory framework for hedge funds take effect through CISCA.
The National Treasury and the FSB received extensive feedback from industry and regulatory bodies and other interested parties, most of which welcomed the proposed framework.
A concern regarding the distinction between Retail and Restricted Hedge Funds resulted in the proposal that Restricted Hedge Funds be renamed Qualified Investor Hedge Funds to accurately reflect their nature and corresponding regulation.
Retail Hedge Funds are envisaged to comply with stricter regulation to ensure protection of ordinary investors, while the Restricted (Qualified Investor) Hedge Funds will target qualified investors, and regulation will focus on systemic risk reporting, monitoring and adequate disclosure to investors.
In terms of next steps, a drafting panel constituted by the FSB, the Treasury, experts and relevant industry associations will prepare a draft of the regulations. These are expected to be issued in the first quarter of 2014 for public comment.
The final regulations, expected to include a transitional period for implementation, should be finalised by the second quarter of the year.
