The below is copied from the Financial Engineer website.
Liquid Securities only
- 0% Exposure to Commodities
- 0% Exposure to Property / Real Estate
- 0% Exposure to Private Equity
- 0% Exposure to illiquid securities
Risk Management
- VaR of a fund cannot exceed 20%, with 99% confidence level and 20 days holding period; minimum historical observation period of 1 year.
- Stress testing for derivatives must be carried out at least once a month.
- Daily risk monitoring is carried out to ensure compliance with fund restrictions.
- Fund Managers are financially liable for any losses incurred from any advertent breaches of the Fund restrictions.
Borrowing
- A Fund cannot borrow more than 10% of the NAV
- Additional exposure is available through Swaps (no Recourse)
Issuer Control Limits
- A Fund cannot hold more than 10% of any one companies issued stocks, bonds or money market instruments, including through derivatives
Concentration Limits
- Positions of same issuer must be less than 10% of NAV (can be up to 25% of NAV if a credit institution, or up to 35% if government backed)
- Total aggregate positions as above that are greater than 5% and less than 10%, must be less than 40% of NAV
- Cash deposits with one credit institution must be less than 20% of NAV
- Derivatives from the same issuer must be less than 5% of NAV (10% if the counterparty is a credit institution)
- Collateral reduces the exposure to an entity
- Aggregate exposure to a given entity across all the above (transferable securities + deposits + derivatives – collateral) must be less than 35% of the NAV
Liquidity
- Daily marked to market
- Daily or weekly liquidity
Investment Restrictions
- Physical short-selling is disallowed; short exposure can be obtained through single-stock swaps with limited counterparty risk
- Warrants (direct or through derivatives) must be less than 5% of the NAV
Corporate Governance
- All directors of a Fund must be independent of the Investment Manager
- An independent Auditor, Administrator and Custodian must be appointed
- Independent Risk Reporting must be provided
Transparency
- Underlying holdings
- Semi-annual and annual reports
- Prospectus and KIID must give particular risk warnings
- KIID must give risk/reward indicator
