After five years of talking about the need to regulate hedge funds as a type of financial institution in South Africa, the Minister of Finance in his budget speech stated that with effect from 1 April 2015 “hedge funds will be treated as collective investment schemes with appropriate governance and tax implications.”  On the same day as the budget speech, the Minister of Finance issued a declaration confirming that in terms of section 63(1) of the Collective Investment Schemes Control Act, 2002 (CISCA) hedge funds will, from 1 April 2015, be regarded as a type of collective investment scheme (Declaration).

What structures will be regulated

For the purposes of CISCA a “hedge fund” is defined as an arrangement pursuant to which any section of the public may be invited or permitted to invest money or any other asset in a structure which uses any strategy or takes any position which could result in losses being incurred greater than the aggregate market value of such structure at any point in time and which strategy or position may include leverage or net short positions.

Qualified Investor and Retail Hedge Funds

Following the publication of the Declaration specific requirements for hedge funds were published under Board Notice 52 in Government Gazette 38540 of 6 March 2015 (Requirements).  The Requirements distinguish between qualified investor hedge funds and retail hedge funds.  The specific duties and on-going requirements imposed on qualified investor hedge funds are less onerous than those imposed on retail hedge funds.  A “qualified investor” is defined in the Requirements as being any person who will invest a minimum investment amount of one million Rand per hedge fund and who either has “demonstrable knowledge and experience” in financial matters thereby enabling the investor to assess the merits and risks of a hedge fund investment or has appointed a financial services provider with such knowledge and experience to advise the investor in relation to such investment.  The obligation is placed on the manager of a qualifying investor hedge fund to obtain a declaration of eligibility from each qualified investor.

Managers of retail hedge funds are required to comply with detailed counterparty exposure restrictions, prudential asset class requirements and specific derivative requirements including an ability for any over-the-counter derivative to be valued.

General requirements applying to both qualifying investor hedge funds and retail hedge funds include a defined list of derivative counter parties, the requirement for an established remuneration and reward policy and a prohibition on naked short selling.

What this means for hedge funds operating in the South African market

Any person conducting the business of a “hedge fund” as defined in the Determination is required within six months from 1 April 2015 to lodge with the Registrar of Collective Investments an application for registration as a manager of a hedge fund in terms of CISCA.  Compliance with the Requirements by a manager of a hedge fund existing at the date of the commencement of the Requirements is effective from the date 12 months after the registration of the person as a manager of a hedge fund.