The SFC published its conclusions on the Consultation Paper on the Review of the Hedge Fund Guidelines (HF Guidelines) contained in Chapter 8.7 of the Code on Unit Trusts and Mutual Funds, which were generally supportive of its main proposals:

• to adopt a holistic approach in the assessment of a management company, and providing greater flexibility in recognising the experience of fund manager’s key personnel;
• to increase the transparency of the management company’s operations through additional disclosures in the offering documents of its risk monitoring and due diligence process; and
• to consolidate and codify existing SFC regulatory practices in the application of HF Guidelines by way of additional notes.

However, taking into consideration the responses of the Consultation Paper, recent international regulatory developments, and the need to ensure investor protection, the SFC has decided that:

• the minimum subscription threshold for SFC-authorised single hedge funds is maintained at US$50,000; and
• there will not be a relaxation of the current restriction imposed on the level of collateralisation to prime brokers for SFC-authorised hedge funds.

The SFC says it will keep monitoring the overseas regulatory and market developments regarding these two issues, and may revisit them in the future.

Respondents also provided comments relating to other provisions of the HF Guidelines. In view of these comments, the SFC has made revisions to clarify its regulatory intent on certain provisions, such as the requirements on valuation. The HF Guidelines requires SFC-authorised hedge funds to value their assets in a fair and independent manner. A principles-based approach has been adopted in the revised HF Guidelines to set out the general principles in respect of fair and independent valuation, including the need to ensure proper segregation of the functions of investment management from those of valuation and the need to maintain proper checks and balances in the way valuation is carried out.

Mrs Alexa Lam, SFC’s Executive Director of Intermediaries and Investment Products, said: “The Commission is fully aware of the changing international regulatory landscape for hedge funds. Extensive discussions about the risks associated with hedge funds and how to handle these risks are taking place among industry and market practitioners as well as regulators in major overseas jurisdictions. As one of the first jurisdictions to allow the sale of hedge funds to the investing public, the Commission will continue to monitor the international regulatory developments in the hedge fund arena, and make further changes to the HF Guidelines when necessary.”