Australian Regulator Releases Draft Disclosure Guidance for Hedge Funds

Australian Securities and Investments Commission (ASIC), market watchdog, released for consultation draft regulatory guidance with new disclosure benchmarks and principles for hedge funds to improve investor awareness of the risks associated with these products. 

The guidance, contained in Consultation Paper 174 Hedge funds: Improving disclosure — Further consultation (CP 174), sets out the specific features and risks of hedge funds that should be addressed in a Product Disclosure Statement (PDS) for these products. 

ASIC Chairman Greg Medcraft said it was necessary to ensure that disclosure gives investors the information they need to make an informed investment decision, which may include a decision not to invest in these products. 

‘Our proposed disclosure guidance has been prompted by our experience that, in some cases, inadequate disclosure has contributed to investors not understanding the risks when purchasing a hedge fund product,’ Mr Medcraft said. 

‘It is one of ASIC’s priorities to ensure that investors and financial consumers are confident and informed — particularly before they invest in financial products. 

‘Improved disclosure of the risks associated with hedge funds is particularly important because hedge funds can pose more diverse and complex risks for investors than traditional funds due to their various investment strategies, complicated structures and use of leverage, short selling and derivatives.’ 

The proposed principles and benchmarks cover a range of disclosures relating to the responsible entity, the individuals making the investment decisions for the fund, service providers, fund strategies and fund assets. Where a hedge fund has invested 25% or more of its assets in an underlying hedge fund or structured product, the disclosure principles and benchmarks should be taken to apply to each such underlying fund or structured product. 

Hedge funds must disclose whether they meet the benchmarks and if not, why not. ‘Why not’ means explaining how they will deal with the business factor or the issue underlying the benchmark. Where ASIC has provided guidance on a disclosure principle, this identifies a particular feature or risk of hedge funds that we consider a responsible entity should clearly and prominently address in the PDS. 

CP 174 also addresses our response to submissions on Consultation Paper 147 Hedge funds: Improving disclosure for retail investors (CP 147), which was published in 2011. 

Comments on the consultation paper are due by 19 April 2012.