South African Hedge Funds’ from a regulatory perspective can be split into two:
- QIHF – Qualified Investor Hedge Funds
- RIHF – Retail Investor Hedge Funds
As a RIHF is more onerous we will focus on this regulation.
Borrowing/Repurchases
- A Fund cannot borrow more than 10% of the NAV
- Additional exposure is available through derivatives but if the derivative is settled via
- cash settlement – sufficient assets in liquid form must be available to effect settlement
- physical settlement – sufficient physical assets or sufficient assets in liquid form must be available to effect settlement
Valid Securities
- All liquid listed equity, money market and fixed income securities
- 20% Exposure to commodities provided listed on an exchange and limited physical settlement applies
- 20% Exposure to unlisted equity
- 10% Exposure to ‘other’ securities
- 0% Exposure to immovable property, QIHF’s & private equity
Risk Management
- Funds can determine exposure & leverage by either
- Value-at-Risk (VaR) or
- Commitment (Exposure) approach
- VaR of a fund cannot exceed 20%, with 99% confidence level and 20 days holding period (1 month); minimum historical observation period of 1 year with daily historical measurements.
- Daily VaR may only exceed the daily P&L 4 times in a rolling 250 day window
- Using Commitment approach, Exposure <200% of NAV
- Regular Stress testing for derivatives must be carried out
Counterparty (Issuer) Control Limits
- Netting is permitted to the same counterparty within the same portfolio
- A Fund cannot hold more than 30% of any one counterparty
Concentration Limits
- Positions of same security must be less than 10% (can be up to 30% but aggregate positions greater than 10% must be less than 40% of NAV)
- Counterparty exposure must be less than 30% of NAV
- Collateral reduces the exposure to an entity
Investment Restrictions
- Physical & derivative short-selling is allowed but naked short-selling is not allowed
Corporate Governance
- All directors of a Fund must be independent of the Investment Manager
- Independence of Auditor, Administrator and Prime Broker
- Maximum fee charges must be declared
Transparency
- Monthly, quarterly & annual reporting
- Illiquid stocks (greater than a month to liquidate) must be reported
Issues to be Clarified
- Independent Risk Reporting
- Daily marked to market (pricing)
- Liquidity measurement
- Look trough to underlying holdings
