INTERNATIONAL: IOSCO publishes the Final Report on Funds of Hedge Funds

Wednesday June 25 2008

The technical committee of IOSCO have published their final report (‘The Report’) entitled ‘Regulatory and Investor Protection Issues Arising from the Participation by Retail Investors in (Funds-of) Hedges Funds’. The report considers the regulatory issues arising from the investment of retail investors into hedge funds and describes some of the approaches for addressing the consequences of these issues upon retail investors. The report also deals with the fact that funds of hedge funds are what concerns most regulators rather than the actual hedge funds itself as the former are the main medium for the attraction of retail investment into the area of hedge funds.

In February 2003, the Technical Committee (TC) released the IOSCO 2003 Report. The aim of the report was to look into regulatory issues arising from the investment of retail investors into hedge funds. Since this time the volume of traded funds of hedge funds has significantly increased and important regulatory developments have occurred in various jurisdictions leading to the TC’s decision in February 2007 that more work was required under a new mandate.

Pursuant to this the SC5 mandate:

* examined the existing regulations of funds of hedge funds (or proposed regulations)in various TC standing committee on Investment Management (SC5) member jurisdictions;

* identified the main issues of concern to regulators in the area; and

* Proposed to consider the potential development in specific areas of ‘elements of international regulatory standards on funds of hedge funds’ based on best market practises. This is on the basis of the SC5 members’ assignment.

The Report will support the SC5 mandate as detailed and will present the SC5 member jurisdictions regulatory approaches (existing and proposed regulation) regarding funds of hedge funds. This will globally confirm the observations made and the related investor protection regulatory issues highlighted in the IOSCO 2003 Report. Further it will cover the point that funds of hedge funds are largely regulated or authorised in most SC5 jurisdictions, the rules generally based on the regime for traditional collective investment schemes as potentially completed by specific rules. The Report identifies that concerns for regulators could be raised by the minimal or lack of investor regulatory protection and consequently identifies additional investor protection regulatory issues.

Finally, The Report proposes to potentially consider whether further work is required to determine if additional guidelines are needed to complete the guidelines detailed by the IOSCO 2003 Report. In particular it is considered if work is required for the purpose of developing guildlines regarding methods that may be used by funds of hedge fund managers. This will allow them to deal more appropriately with liquidity risk and the nature and conditions of due diligence (particularly in relation to valuation) prior to and during investment.