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.



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


Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.


What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.


Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.


Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.


Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?



© 2021 Morningstar, Inc. All rights reserved.

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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.