Oz Regulators Probe Hedge Funds

by Mary Swire, Investors Offshore, Hong Kong

10 March 2003

As part of a wide ranging programme to strengthen supervision throughout the Australian investment management industry, under which superannuation funds are already under review and where a more robust licensing regime for trustees has been imposed, the Australian Prudential Regulation Authority (APRA) has announced that it has begun to investigate whether hedge fund trustees perform adequate and appropriate due diligence investigations before making investments in hedge funds, and to probe the management of the funds themselves.

As the international equity investment environment has deteriorated in recent years, hedge funds have become increasingly popular as a way to seek superior investment returns albeit with higher volatility and risk..

In moves and statements reminiscent of SEC regulators' actions underway in the US, the APRA is concerned about 'super funds' on a number of counts. Main causes of concern include the funds' adoption of narrow investment strategies, with freedom to buy and sell short whilst borrowing sometimes significant capital. To these worries are added the singular management style of most funds, differing complexities of management strategies, variable disclosure and reporting, and their short term trading histories without the use of benchmark performance measurement techniques.

Hedge funds APRA senior manager Louis Serret says: "We will be examining investments in hedge funds, and the processes used to assess these when we visit 'super funds'. We have already started doing this and we will continue until we are satisfied that the majority of funds are adequately addressing the concerns (APRA has about these funds)."

Serret adds that APRA is "not 100 per cent" satisfied with what it has already seen. "There is room for improvement," he says, adding: "(In some cases), we have not seen the actual paperwork or consideration that we would have expected to have seen before an investment was made in hedge funds."

Commenting on the APRA's initiative, Damien Hatfield, Chairman of the Alternative Investment Management Association, broadly welcomed the attention being given to this investment area but was unhappy that neither the AIMA nor the Australian Institute of Superannuation Trustees had received prior notice or consultation on the APRA's intentions.

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