South African regulator to license hedge fund managers

South Africa's Financial Services Board has introduced new rules under the country's Financial Advisory and Intermediary Services Act that will require hedge fund managers and investment advisers to apply for a licence by the end of February next year.

The changes include the definition of a hedge funds 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, and which strategies or positions include but are not limited to leverage or net short positions.'

Under amendments to the Codes of Conduct for Administrative and Discretionary Financial Services Providers, intermediaries providing services to hedge funds and funds of hedge funds will be required for the first time to inform their clients of the risks involved and to obtain written mandates from clients confirming their approval of the investment objectives, trading philosophies and investment strategies adopted by the fund.

A change to the regulation setting out fit and proper requirements for financial services providers creates a new category for hedge fund managers. To obtain a Category IIA licence, the applicant will be required to demonstrate honesty and integrity, a track record of managing hedge fund strategies, and knowledge, skill and competency in managing all instruments and asset classes comprising a hedge fund portfolio. The new requirements will come into force on April 29 next year.

The changes have been welcomed by the South African chapter of the Alternative Investment Management Association, whose chairman, Ian Hamilton, told the newspaper Business Day: 'We have been working with the FSB and other industry organisations for more than two years and our efforts have come to fruition.

'With lower professional qualifications, more experience is required. The majority of hedge fund managers have an appropriate business honours degree and would consequently require three years' experience managing funds with similar strategies to those they are currently managing. If they do not have the necessary qualifications, they would require more experience.'

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