Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 38

ASIC’s focus on hedge funds may miss bigger picture

After a long consultation period, ASIC has amended its regulatory guidance relating to hedge funds (RG240) to focus on “… those funds that pose more complex risk to investors”. I discussed ASIC’s previous version on improving hedge fund disclosure in Cuffelinks on 1 April 2013. Many others raised concerns, with the prize for the most colourful title going to Mallesons with their, “Who’d be a hedgie? Could new reforms regulate hedge funds out of existence?”

Since then, ASIC continued to extend relief from the disclosures required under RG240 and in October 2013 released an updated version, to commence from 1 February 2014. ASIC Commissioner Greg Tanzer was quoted as saying, "Our changes will benefit the industry by relieving some lower-risk funds from the more extensive disclosure obligations imposed on a hedge fund under RG 240." From this comment the intention of the disclosure is evident: to create more extensive disclosure obligations for hedge funds, thereby protecting potential investors.

Revisions in ASIC’s updated version

What are the changes? The updated version of RG 240 makes only subtle changes to the definition of a hedge fund, in response to feedback from some groups that want to avoid this label. The broad definition of a hedge fund remains (full details here), namely a fund which promotes itself as a ‘hedge fund’ or one that exhibits two or more characteristics of hedge funds, the five characteristics being: complexity of investment strategy or structure, use of leverage, use of derivatives, use of short selling and charging of a performance fee.

The changes in the updated RG240 only apply to the descriptions of these characteristics:

  • under the characteristic of ‘complexity of investment strategy’, benchmarking to a blend of traditional market indices (such as traditional multi-asset class funds) is now excluded as a characteristic of a complex investment strategy
  • under ‘complexity of structure’, ASIC has clarified the definition of interposed entities (ASIC views too many interposed entities involved with the end product as a characteristic of a hedge fund) to relieve those parties using an authorised investment vehicle in a foreign jurisdiction
  • under ‘use of derivatives’, ASIC now does not consider the use of exchange-traded derivatives where the notional derivatives exposure does not exceed 10% of a fund’s net asset value as a defining characteristic of a hedge fund.

Extra disclosures for ‘hedge funds’

As discussed in my previous article, if a fund is deemed to be a hedge fund then it faces more significant disclosure requirements in the areas of:

  • investment strategy: detail of the strategy, exposure limits
  • investment manager: increased disclosure around key staff, qualifications, background, employment contracts
  • fund structure: detailed disclosure around the structure of the fund and service providers, and fees through the structure
  • custodial: valuation, location and custody of assets, custodial arrangements, and a list of all instruments and markets traded
  • liquidity: description of liquidity policy and any illiquid positions
  • leverage: disclosure of leverage and possible ranges
  • derivatives: a fair amount of disclosure required
  • short selling
  • withdrawals: disclosure around withdrawals and associated risks.

These areas of disclosure are what ASIC calls benchmarks and disclosure principals. ASIC advises that every PDS for a hedge fund should meet these disclosure requirements. However a responsible entity can adopt an ‘if-not-why-not’ approach where they do not disclose on a particular issue and clearly explain why they didn’t disclose and the risks this may create for investors. Of course ASIC may choose to not approve PDS’s with insufficient disclosure.

Will RG 240 work? If the objective of ASIC is to avoid repeats of the types of losses we saw with Astarra Strategic Fund and Basis Yield Alpha Fund, then RG 240 will assist but will not guarantee repeats of these events. ASIC’s model is to seek disclosure and then leave the rest to the (now presumed to be informed) investor. The investor can choose to use or not to use this additional information. Lack of investment knowledge and the behavioural biases that exist in investing will undoubtedly ensure future disasters.

What are some of the consequences?

Financial planners may ‘discover’ they have clients invested in hedge funds. Do they have to change their Statement of Advice? Will PI (professional indemnity) insurance bills be higher for financial planning groups which include hedge funds on their approved products list? If they change client portfolios as a result, there may be capital gains tax realisations.

The underlying hedge fund managers will be most affected. Some of the disclosures affect their ability to run their business (for instance they have to list key people and outline some details of their employment contracts), raise assets (the financial planning community may be deterred from recommending hedge funds) and protect their investment strategy (disclosure of instruments and use of leverage may give competitors some insight as to their strategy). I am not overly concerned about any changed perception of the hedge fund industry – it is full of complex products.

My main concern is that the term ‘hedge fund’ is used as the parking bay label for complex investments. The complementary set of investment products to those defined as ‘hedge funds’ will contain many investments which are complex. People may incorrectly regard investments which are not hedge funds as not being complex. Consider just a few: geared share funds, the range of equity income funds that use derivatives, new-age total return balanced funds, the more flexible fixed income and cash funds, the list goes on ... There are complex funds all around yet they may not be labelled as a hedge fund.

Better to focus on ‘complexity’

In my submission to ASIC for RG 240, I suggested that instead of focussing on hedge funds there was a one-off opportunity to focus on investment product complexity itself. Instead of defining hedge funds, ASIC could define complexity (for example a ‘complex’ investment may only require one of the five characteristics listed above), and disclosures appropriately designed. Funds could then label themselves as they like and ‘hedge fund’ would not be held out as the area where all the complex investments funds reside.

This type of approach would take the stigma out of complexity. These ‘complexities’ are usually used for a positive reason – to enhance returns or manage risks - but also highlight that extra consideration is required by investors. Investors would become more aware that many products have elements of complexity to them. It would also reduce ‘regulatory arbitrage’ where the provider designs a product to avoid being caught under particular regulations. Finally, as new products and categories are created, there is an over-arching definition of complexity that would catch these products rather than ASIC having to develop specific guidance.

Overall, while RG 240 will assist investors to be more aware when they are considering a hedge fund investment, I can’t help but feel it is an opportunity lost in terms of the bigger picture of investor protection in a world of complex investments. 

 

David Bell’s independent advisory business is St Davids Rd Advisory. David is working towards a PhD at University of NSW.

 

RELATED ARTICLES

How ASIC defines ‘hedge funds’ and what it means to you

Respect for markets and judging HFT

Hedge funds no systemic risk to financial system

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.