Hedge funds designated a collective investment scheme
South AfricaWithout Prejudice
On 25 February 2015 the Minister of Finance declared the business of a hedge fund to be that of a collective investment scheme to which certain provisions of the Collective Investment Schemes Control Act of 2002 will apply (the Declaration). Draft Regulations for Hedge Funds in terms of the Act were published on 16 April 2014 and the Declaration commenced on 1 April 2015. Hedge fund managers will have six months to lodge an application for registration as a manager of a hedge fund with the Registrar in accordance with section 42.
The Declaration defines a hedge fund as "an arrangement in pursuance of which members of the public are invited or permitted to invest money or other assets and which uses any strategy or takes any position which could result in the arrangement 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". This definition is in accordance with the Draft Regulations.
Although the majority of the provisions of the Act apply to hedge funds, there are a few exceptions; ostensibly they will be dealt with in the imminent Regulations. One such exception is section 96, which requires hedge funds to specify in their deed the "limits, terms and conditions under which a manager may borrow money". “Deed” means the agreement between a manager and a trustee or custodian, or the document of incorporation whereby a collective investment scheme is established and in terms of which it is administered, and includes the deed of a management company which immediately prior to the commencement of this Act was a management company in terms of any law repealed by this Act. Unless the deed specifically allows for managers of hedge funds to do so, they will not be entitled to borrow money against the assets of the fund in the event that that the portfolio has insufficient liquidity or is unable to acquire participatory interests of investors when called on to do so.
In terms of the Draft Regulations, retail investor hedge funds will have a 30-day liquidity requirement for the repurchase of participatory interests, while qualified investor hedge funds will have a 90-day liquidity requirement.
The Declaration also requires that a hedge fund's deed specifies, inter alia, that the hedge fund must repurchase all the participatory interests that investors offer to it. In order to manage this, hedge fund managers will be required to specify, in the hedge fund's deed, a process to be followed for determining the valuation of an investor's participatory interest prior to its disposal.
It is further a peremptory requirement that the manager of a hedge fund segregate the assets of different portfolios within the fund to insulate it from creditor claims and avoid using the assets of one portfolio to satisfy the liabilities of another. In terms of section 5 of the Draft Regulations, a manager is also prohibited from using the assets of one portfolio as margin for another.
The Declaration requires that a hedge fund's deed must contain, inter alia, the following:
- The investment policy and restrictions of each portfolio.
- The precise manner in which the assets of a portfolio are valued and at which time point.
- Whether the hedge fund applies minimum subscription amounts and/or early redemption fees.
- The type of charges and performance fees that may be levied and the basis for their calculation.
- Requirements for the amendment of the hedge fund's deed.
- Requirements for the provision of side letters and the use of facilities.
On 6 March 2015 the National Treasury and the Financial Services Board issued a press release regarding the Declaration. The press release confirmed that registered hedge funds will be subject to the same "flow through tax dispensation" as that accorded to collective investment schemes. Further, it recorded that in line with the recent changes to the current tax matrix, hedge funds will not qualify as tax free savings accounts.
The effect of the Declaration, insofar as relevant provisions of the Act apply to hedge funds, is likely to be viewed as a positive development in the regulation of hedge funds in South Africa. The overarching effect is that certainty regarding the legal status of hedge funds has been advanced and their regulation brought into line with international standards. This in turn is likely to increase investor confidence, as the provisions applicable to the content of the hedge fund deed and the obligations placed upon hedge fund managers are set to promote a greater degree of transparency within the market.