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SFC publishes results of consultation on Hedge Fund Guidelines

Hong Kong's SFC has made minor revisions to its Hedge Fund Guidelines following the publication of consultation results this week.

The SFC published the conclusions of its Consultation Paper on the Review of the Hedge Fund Guidelines on Monday 26 September.

The SFC received 11 submissions from industry participants and professional bodies. In general, respondents were supportive of the three main proposals of the Consultation Paper:
1. To adopt a holistic approach in the assessment of a management company, and providing greater flexibility in recognising the experience of fund manager's key personnel;
2. To increase the transparency of the management company's operations through additional disclosures in the offering documents of its risk monitoring and due diligence process; and
3. To consolidate and codify existing SFC regulatory practices in the application of HF Guidelines by way of additional notes.

Taking into consideration the responses of the Consultation Paper, recent international regulatory developments, and the need to ensure investor protection, the SFC has decided that:
1. The minimum subscription threshold for SFC-authorised single hedge funds is maintained at USD 50,000; and
2. There will not be a relaxation of the current restriction imposed on the level of collateralisation to prime brokers for SFC-authorised hedge funds (See Note 3, below).

However, the SFC will keep monitoring the overseas regulatory and market developments regarding these two issues, and may revisit them in the future.

Respondents also provided comments relating to other provisions of the HF Guidelines. In view of these comments, the SFC has made revisions to clarify its regulatory intent on certain provisions, such as the requirements on valuation.

The HF Guidelines requires SFC-authorised hedge funds to value their assets in a fair and independent manner. A principles-based approach has been adopted in the revised HF Guidelines to set out the general principles in respect of fair and independent valuation, including the need to ensure proper segregation of the functions of investment management from those of valuation and the need to maintain proper checks and balances in the way valuation is carried out.

Alexa Lam, SFC's Executive Director of Intermediaries and Investment Products, said: "The Commission is fully aware of the changing international regulatory landscape for hedge funds. Extensive discussions about the risks associated with hedge funds and how to handle these risks are taking place among industry and market practitioners as well as regulators in major overseas jurisdictions."

She added: "As one of the first jurisdictions to allow the sale of hedge funds to the investing public, the Commission will continue to monitor the international regulatory developments in the hedge fund arena, and make further changes to the HF Guidelines when necessary. "

The revised HF Guidelines will become effective upon its publication in the Government Gazette on 30 September.

Background Notes: 1. The SFC's HF Guidelines are contained in Chapter 8.7 of the Code on Unit Trusts and Mutual Funds (the Code) (Note 1).
2. On 26 May 2005, the SFC issued a Consultation Paper on the Review of Chapter 8.7 of the Code on Unit Trusts and Mutual Funds. The Consultation period ended on 30 June 2005.
3. Under Chapter 8.7(b)(ii) of the Code, where assets of the scheme are charged to the prime broker for financing purposes, such assets must not, at any time, exceed the level of the scheme's indebtedness to the prime broker.

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