Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 9

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

In September last year, the Australian Securities and Investments Commission (ASIC) released a new regulatory guide, RG 240 – Hedge Funds: Improving Disclosure which included a definition of a ‘hedge fund’. ASIC then established benchmarks and disclosure principles that should be included in Product Disclosure Statements (PDSs) for hedge funds. There are a number of interesting ramifications for the investing community.

Hedge funds and non-vanilla investments in general are a difficult area for regulators. By nature, this is a heterogeneous group of funds with vastly different characteristics. If regulators become too prescriptive the rules may not apply well to particular strategies or structures. However if they fail to establish appropriate standards then uninformed investors are at risk of unexpected poor outcomes. It is a tricky tightrope on which to walk.

Hedge fund definitions

RG 240 was initially released for consultation and the final version appears to have taken into consideration the feedback received. ASIC defines a hedge fund in two ways:

  • The fund itself is promoted by the responsible entity as a ‘hedge fund’, or
  • The fund exhibits two or more of the following five ASIC-defined characteristics:

i. Complex investment strategy or structure

The fund aims to generate returns with a low correlation to equity and bond indices, or invests through three or more interposed entities (or two or more interposed entities if at least one of the entities is offshore) where the responsible entity has the capacity to control the disposal of the products or two or more of the interposed entities. As an example think of a domestic fund that invests into an offshore structure over which the responsible entity has some sort of control

ii. Use of leverage

The fund uses debt to increase exposure to financial investments

iii. Use of derivatives

The fund uses derivatives, other than for the dominant purpose of:

- managing foreign exchange or interest rate risk, or

- more efficiently gaining an economic exposure to an investment, through the use of exchange-traded derivatives referenced to that specific asset, but only on a temporary basis (i.e. less than 28 days). An example of this would be using futures to gain exposure to equity markets following a large inflow, and subsequently replacing these exposures with actual stock positions

iv. Use of short selling

The fund engages in short selling

v. Charge a performance fee

The responsible entity (or investment manager) has a right to be paid a fee based on the unrealised performance of the fund’s assets.

The definition is interesting. There are likely to be some cases where investment managers who consider themselves more traditional investment managers may now find themselves a hedge fund under ASIC’s definition. An interesting case study is a number of funds managed by the very popular and successful Platinum Asset Management. The FAQ part of their website states,

“Is Platinum a Hedge Manager? No. We only partially hedge our share holdings with short sales and will generally have net long positions of 50% or more.”

However their PDS discloses that they do take some short positions and that there is the option to charge a performance fee. Under ASIC’s definition, they tick at least two out of the five criteria boxes and would be viewed as a hedge fund. Another example is the now-common equity income funds which may use derivatives and potentially meet ASIC’s definition of a complex investment strategy. PDSs need to be updated to reflect these changes by 22 June this year.

Increased disclosure

ASIC is not necessarily attempting to portray hedge funds as poor or even exceedingly risky investments. Rather, it suggests that hedge funds are more complex in terms of understanding the risks and features and the role they play in a diversified portfolio. ASIC believes investors need  greater disclosure for such products, including:

  • investment strategy: detail of the strategy and 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, fees through the structure
  • valuation of assets: include location and 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: policy and limits
  • withdrawals: disclosure around withdrawals and associated risks.

ASIC calls these 'benchmarks and disclosure principles' and 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 PDSs which do not provide sufficient disclosure.

What are the ramifications for different market participants?

Direct investors have the opportunity to be better informed. Following hedge fund losses such as Astarra Strategic Fund and Basis Yield Alpha Fund, it is understandable why ASIC wants to see better investor information. Question marks remain over the ability of non-financially educated investors to understand the risks even with this additional information, but financial education remains an ongoing industry challenge.

Financial planners may discover that they have exposed their clients to funds which may be subsequently re-defined as hedge funds. Do they have to change their statement of advice? Will PI (professional indemnity) insurance bills be higher for financial planning groups who include hedge funds on their approved products list? If they change client portfolios as a result there may be capital gains tax realisations.

Institutional investors such as super funds should be the least affected as they either have an internal investment team or an external asset consultant which should be professionally assessing each individual investment on its merits.

Finally, it is the actual underlying investment managers (or hedge fund managers) who may be the most affected. They may feel that 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).

Undoubtedly ASIC would have considered all these issues and felt that the possibly unfavourable implications for some in the investment community were more than offset by the overall improvement in disclosure for end investors.



Respect for markets and judging HFT

ASIC’s focus on hedge funds may miss bigger picture

ASIC is not soft: who's next in line for scrutiny?


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.

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

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.

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

Latest Updates


John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.


Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?


The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.


Why green hydrogen is central to achieving net zero

Hundreds of green hydrogen projects show this energy opportunity is finally being taken seriously. While a cost disadvantage and technical challenges need to be overcome, it promises to deliver a path to net zero.



© 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.