INTERNATIONAL: IOSCO publishes regulatory standards for Funds of Hedge Funds

Monday September 14 2009

The International Organisation of Securities Commissions (IOSCO) has published a report entitled “Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices” containing standards aimed at addressing regulatory issues of investor protection which have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds (FoHFs).

This report follows on from a previous report, Funds of Hedge Funds:Final Report, published in June 2008 as well as a consultation in October 2008.

The June 2008 Report identified areas of concernconnected with liquidity risk and the quality of due diligence prior to investment. This latest report has developed proposals in respect of these issues.

IOSCO recommends managers make reasonable enquiries to consider whether the FoHF `s liquidity was consistent with underlying funds. Managers are also required to take into account the liquidity of various financial instruments held by the underlying funds as well as whether any limited redemption arrangements were consistent with the FoHF `s own redemption terms.

Earlier in July 2009, Hedge Fund Standards Board (HFSB) proposed that hedge fund managers should limit redemption requests in order to protect their funds against unexpected levels of redemption due to market uncertainty. Today `s publication calls on FoHFs to ensure that such arrangements are transparent and well documented.

As regards to due diligence processes, the publication calls for FoHFs to regularly review their due diligence processes and have a documented and traceable procedure for selection of hedge funds.

In addition, managers should also have the necessary resources which can deal to deal with the anomalies identified when monitoring the selected hedge funds or implementing any other procedures.