The International Organisation of Securities Commissions (IOSCO) fund of hedge fund (FoHF) report on liquidity risk and appropriate due diligence could impact how the sector is regulated in the future, said a hedge fund expert.
Following a consultation process that involved a number of associations including South African-based Association of Savings & Investment SA and UK-based Thames River Capital L.L.P the report was amended to deal with a number of lingering issues.
Specifically, the report was updated to recommend FoHF managers consider the expertise, experience and qualifications of the underlying hedge fund's portfolio manager and other service providers to determine if they could be liable for breaking the law or professional rules.
The amendments also encourage FoHF managers to take a closer look at the underlying investment strategy to ensure it is "adequate", particularly if the manager's use leverage.
The FoHF manager must assess whether the selection criteria used when choosing underlying hedge funds has been satisfied, and, if they have not, the FoHF manager must be satisfied and be in a position to explain why, the report said.
These amended recommendations come after IOSCO's Technical Committee Standing Committee on Investment Management (TCSC5) proposed developing guidelines to promote transparency and protect investors.
Scott MacDonald, managing director at Van Mac Group, said the report's recommendations would influence pending regulatory changes.
"As the SEC starts to draft new regulations they will be influenced by these sorts of reports," he said.
He said the report's recommendations would make it difficult for those FoHF managers that refuse to detail their operations to attract new money.
"If you're going to be putting money in a FoHF structure, you're going to want a lot more look-through transparency to understand to whom the money is being invested, how they're managing it and their due diligence process," he said.
"It's going to mean the people with the black box that won't tell you anything and charge three and 30 - good luck to fresh money from institutional investors."
