Changes to Hedge Fund Disclosure and Reporting Obligations


In October 2013, the Australian Investment and Securities Commission (ASIC) announced new reporting and disclosure obligations for hedge funds and funds of hedge funds registered in Australia.

By 1 February 2014, fund trustees (responsible entities) will need to make sure their disclosure documents and/or websites are updated to comply with these new obligations. Offshore managers which take investments from registered Australian hedge funds should also be prepared to assist with compliance obligations.

Entities Which Must Comply with RG 240

Regulatory Guide 240: Hedge funds: Improving disclosure (RG 240) provides mandatory disclosure obligations for all entities which meet ASIC's definition of hedge funds or funds of hedge funds offered to retail investors in Australia. Hedge funds which offer products to wholesale investors are 'encouraged' to comply, but are not subject to any compulsion.

RG 240 defines a 'hedge fund' as any registered managed investment scheme that is promoted as a hedge fund or that exhibits two or more of the following characteristics of a hedge fund: 

  • complexity of investment strategy or structure (determined by reference to multiple interposed entities) 
  • use of leverage 
  • use of derivatives (other than for the dominant purpose of managing foreign exchange or interest rate risk, gaining economic exposure on a limited temporary basis, or the use of exchange traded derivatives) 
  • use of short selling 
  • charging a performance fee out of the fund's assets.

This is a novel definition, and the scope of the definition may mean that a fund which has not previously identified itself as a hedge fund could now be required to disclose in accordance with RG 240. As a result, responsible entities should carefully consider their investment strategies and structures to determine whether the additional disclosures required by RG 240 will need to be made.

RG 240 also introduces a definition for a 'fund of hedge funds', being any registered managed investment scheme that has at least 35% of the fund's assets invested by the responsible entity in one or more schemes meeting the definition of hedge fund above (including Australian funds and overseas funds which would meet the definition if they were operating in Australia); or is promoted as a fund of hedge funds.

In addition to having to comply with all the new disclosure obligations applicable to hedge funds, funds of hedge funds will have to collect and disclose a range of information in respect of underlying fund managers.

Benchmarks and Disclosure Principles for Hedge Funds and Funds of Hedge Funds

Under RG 240, hedge funds and funds of hedge funds will be required to disclose against two benchmarks, valuation and periodic reporting, and a number of disclosure principles.

For funds of hedge funds, the responsible entity will be required to disclose information about the underlying funds in which they invest on a look-through basis. In this respect, responsible entities should be aware that significant oversight of underlying funds may be required (as described below) and should have arrangements in place to obtain any necessary information.

Overseas fund managers should consider whether they will be required to disclose to Australian-based responsible entities and have appropriate mechanisms in place to manage disclosures.

Benchmark Policies


Responsible entities are expected to have a policy in place to ensure that the fund's assets are independently valued. Responsible entities must ensure that they maintain sufficient expertise to monitor the performance of any asset valuation.

Periodic Reporting

Responsible entities should also have a policy in place to ensure adequate and up-to-date periodic reporting on key information, including in relation to asset allocation, the liquidity and maturity profiles, leverage ratios, derivative counterparties, investment returns and key service providers. This information must also be provided in relation to any significant underlying fund which account for 35% or more of the fund of hedge funds' invested assets.

These reports must be made publically available on the hedge fund or fund of hedge funds' website.

If a fund does not have a policy in place on independent valuation or periodic reporting in accordance with these benchmarks, the responsible entity must disclose details of why no such policy has been implemented.

Disclosure Principles

RG 240 provides disclosure principles for responsible entities, which require disclosure of information about the fund's:

  • investment strategy
  • investment managers and other key people responsible for managing the fund's investments 
  • investment structure 
  • valuation, location and custody of assets 
  • liquidity 
  • use of leverage
  • use of derivatives 
  • use of short selling
  • withdrawals policy.

Key aspects of the disclosure principles which responsible entities should adopt in a fund's updated Product Disclosure Statements (PDS) include:

a) Investment Strategy

In relation to the fund's investment strategy, disclosures should address:

  • the fund's investment strategy including typical investments, key dependencies underpinning the strategy, associated risks and risk management, diversification guidelines and how investors will be notified of changes to the investment strategy 
  • if any underlying fund accounts for 10% of the fund's assets, why that fund was selected and how it fits with the investment strategy 
  • for funds of hedge funds, their strategy and due diligence process for selecting significant underlying funds.

b) Investment Manager

Disclosures should be made in relation to the fund's investment managers which: 

  • provide information on the identities, qualifications and experience of any individuals playing a key role in investment decisions, details of any significant adverse finding against any investment manager, and the circumstances in which an investment manager may be terminated 
  • outline the terms of the appointment of any external investment managers or advisors 
  • for funds of hedge funds, provide information about the investment managers for any significant underlying fund.

c) Valuation, Location and Custody of Assets

In relation to the valuation, location and custody of the fund's assets: 

  • for responsible entities for hedge funds, disclosures should be made relating to the key aspects of their valuation policy, the types of assets the fund invests in or may invest in, and details of custodial arrangements for the holding of assets 
  • for funds of hedge funds, responsible entities are expected to disclose their valuation policy in full, along with information relating to the types of underlying funds invested in, the ranges of investment allocation for underlying funds, policies on the geographic location of underlying funds, and details of custodial arrangements of underlying funds.

d) Investment Structure

The responsible entity should provide disclosures of information relating to the fund's: 
investment structure and jurisdiction of relevant entities 

  • investment structure and jurisdiction of relevant entities
  • details of related party relationships and any non-arm's length arrangements within the structure 
  • key service provider arrangements 
  • any risks associated with the structure.

e) Liquidity

Where 80% of a hedge fund or fund of hedge funds' assets cannot be expected to be realised within 10 days, the responsible entity is expected to disclose key aspects of the fund's liquidity management policy and details of any asset class that accounts for 10% or more of the fund's assets which is illiquid.

f) Use of Leverage, Derivatives and Short Selling

Details of the fund's use of derivatives and short selling and the associated risks should be disclosed.

Where funds are making use of leverage:

  • disclosures should be provided in regard to the circumstances in which leverage can be used by the fund, the sources of leverage, the net value of any leverage and any exposure of the fund's assets due to leveraging 
  • for a fund of hedge funds, further information should be disclosed about any policy in relation to acceptable types of leverage used by underlying funds and a reasonable estimate of the net value of leverage in underlying funds.

g) Withdrawals

The responsible entities are expected to provide disclosures of information regarding the fund's withdrawals policy including the circumstances in which the responsible entity allows withdrawals and how this might change.

Steps to Comply

As noted above, responsible entities will need to examine their investment strategies and structures to determine whether they need to comply with the new disclosure obligations from 1 February 2014.

Existing product disclosure statements (PDS) can remain in circulation provided that the additional disclosures required under RG 240 appear on the responsible entity's website. New PDSs issued after 1 February 2014 will need to comply with RG 240.

ASIC has indicated that it expects hedge funds and fund of hedge funds to have a page on their website dedicated to keeping investors informed of any changes to information required to be disclosed under RG 240.

Our experience to date with responsible entities which are caught within the new hedge fund definition is that the additional disclosures required are modest and can be included reasonably quickly.

Funds of hedge funds will also need to put in place mechanisms to facilitate reporting on underlying funds together with enhanced supervision and monitoring of investments in underlying funds. In this regard, offshore managers should be prepared to assist Australian responsible entities meet g their disclosure and reporting obligations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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