The DFSA’s move to issue a Code of Practice comes in the wake of enhanced industry and regulatory focus on hedge funds. The Code addresses some specific risks that are associated with hedge funds, and reflects the DFSA’s commitment to risk-based regulation.

The issuance of the Code follows several months of consultation with industry professionals and international regulators, who were invited to comment on the proposed rules and offer their opinions on the Code of Practice.

There are nine high-level principles in the Code, which cover areas of key operational, management and market-related risks, particularly on matters such as valuation of assets, back office functions and exposure to market risks.

Commenting on the issuance of the Code, David Knott, Chief Executive of the DFSA explained: “While there are a number of industry-based Hedge Fund Codes, the DFSA’s Code is the first of its kind to be issued by a regulator. Having received highly positive feedback throughout the consultation period, we are confident that the Code will provide investors and Hedge Fund Managers with a backdrop for the successful development of Hedge Funds in the DIFC by ensuring the industry has the necessary regulations in place to prosper. This initiative reflects our commitment to the continued development of the DIFC as an attractive and well-regulated environment for Hedge Fund Operators and prospective investors.”

The nine high level principles are as follows:

Principle 1 – An Operator of a Hedge Fund should have, or have access to, appropriate skills and resources to conduct the operations of the Fund.

Principle 2 – An Operator of a Hedge Fund should develop and implement a robust and flexible investment process to suit the objectives and risk profile of its investment strategies.

Principle 3 – An Operator of a Hedge Fund should have systems and controls to mitigate trading related risks such as price overrides and failed trades.

Principle 4 – An Operator of a Hedge Fund should have adequate back-office systems and controls to avoid backlogs in trade confirmations.

Principle 5 – An Operator of a Hedge Fund should have appropriate measures to identify and manage portfolio risks.

Principle 6 – An Operator of a Hedge Fund should have adequate valuation policies and procedures to ensure integrity, accuracy and timeliness of the valuation process.

Principle 7 – An Operator of a Hedge Fund should not have arrangements under which any material benefits or concessions are provided to some investors where it would be unfair to any other investors in the Fund.

Principle 8 – An Operator of a Hedge Fund should have adequate systems and controls to deal with market sensitive information.

Principle 9 – An Operator of a Hedge Fund should not invest in an underlying Hedge Fund without appropriate due diligence.