Thinking | 10 October 2013

ASIC releases revised definition of ‘Hedge Fund’


The Australian Securities and Investments Commission (ASIC) has finally released (3 October 2013) the long-awaited changes to the definition of a ‘hedge fund’ (and ‘fund of hedge funds’) for the purposes of determining the application of the shorter Product Disclosure Statement (PDS) regime, and the application of enhanced PDS disclosure under ASIC Regulatory Guide RG240.  The original ‘hedge fund’ definition was unclear and too broad which had the unintended consequence of capturing many types of funds that should not have be treated as hedge funds.

The troubled history of this definition is reflected in the number of delays in its finalisation. The shorter PDS regime applying to simple managed investment products commenced on 22 June 2012.  At the last minute, ASIC issued interim relief to exclude ‘hedge funds’ from the application of the shorter PDS regime and to allow those ‘hedge funds’ that had prepared shorter PDSs until 22 June 2013 to transition back to a long form PDS. The transition date had to be extended to 1 February 2014 as it became clear that the original definition of ‘hedge fund’ was too broad and unworkable.  ASIC has since consulted significantly and widely with industry to refine the definition.  It is intended that that the re-worked definition of ‘hedge fund’ will allow the more accurate targeting of the types of funds which pose more complex risks for investors.  As ASIC Commissioner Greg Tanzer stated, “Our changes will benefit the industry by relieving some lower-risk funds from the more extensive disclosure obligations imposed on a hedge fund.”

How has the definition of ‘Hedge Fund’ changed?

PHASE 1 - Preliminary investigation
0-48 hours
Upon receiving instructions from underwriters:
(a) perform and communicate to underwriters the results of a conflict check;
(b) make contact with the insured and arrange interviews; and
(c) review documents provided by underwriters.
Hall & Wilcox to determine whether or claim is appropriate for FLIP plan or if timeline needs to be varied due to complexity.
Hall & Wilcox to promptly have sufficient information to understand:
(a) the nature of the claim for indemnity;
(b) what information is needed in the short term from the insured; and
(c) What questions need to be put to the insured.
Relationship: Matt Curll
Otherwise relevant indemnity coverage team member
PHASE 2 - Secondary investigations
48-96 hours
Hall & Wilcox:
(a) to interview the insured, including key witnesses and employees; and
(b) review further documents provided by insured.
Interview to take place for two purposes:
(a) understand indemnity coverage; and
(b) understand claim, including value.
To obtain a better understanding of the claim and the policy response.Relevant regulatory team + relevant indemnity coverage team as necessary
PHASE 3 - Initial recommendation
96 hours to 5 business days
Hall & Wilcox to provide a preliminary opinion to underwriters on indemnity.
Preliminary opinion to be communicated through short form (email) report with telephone call if convenient. .
To fast track indemnity decision and give underwriters notice of what is likely to be the advice of Hall & Wilcox.
Underwriters will have a better handle on the issues and so are able to provide prompt instructions once written advice provided.
PHASE 4 - Initial advice
10 business days

Hall & Wilcox to provide to underwriters:
(a) initial advice. Depending on circumstances and complexity of claim - this may be an abridged version. Initial advice will principally be for the purpose of:
(i) making recommendations on indemnity - including indemnity claim reserve;
(ii) providing a draft indemnity letter to the insured for approval; and
(iii) advice on what is involved in the claim and initial defence cost reserve;
(ii)(iv) where possible, provide analysis on liability and quantum and indemnity claim reserve.
PHASE 5: Indemnity decision
14 business days
Communicate (preliminary) indemnity decision to insured and/or its broker. If indemnity is confirmed (and provided there are no conflicts or special circumstances), underwriters to assume conduct of the insured’s defence and pre-agree rates.Relevant indemnity coverage team member
PHASE 6: Ongoing Management and CommunicationRegulatory team to manage conduct
Regulatory + Insurance team to co-ordinate update reports to underwriters as agreed reporting on developments, strategy and reserves
Underwriters keep appraised of their risk and strategy in conduct of defence generally.Relevant regulatory team + relevant indemnity coverage team as necessary

What should you do now?

  • Fund managers should review their fund investment structure and strategy against the revised definition of ‘hedge funds’ and ‘funds of hedge funds’.

  • If the fund meets (or continues to meet) the definition:

    • If a short PDS is currently being used for the fund (because the fund was previously thought to be outside the definition), a long PDS must be in place by 1 February 2014 and the PDS must satisfy RG240 enhanced disclosure requirements.

    • If a long PDS is currently being used for the fund, the RE must consider the extent to which it needs to meet its enhanced disclosure requirements under RG240 from 1 February 2014.

  • If the fund no longer meets the definition and is using a short or long PDS, the RE should consider the application of the shorter PDS regime to the fund and ensure compliance from 1 February 2014.

This article was written with assistance from Avi Gordon, Lawyer.


Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

Eugene Chen

Eugene Chen

Partner & Head of China Practice

Eugene advises Australian and Chinese clients on capital raising, funds management, licensing, anti-money laundering and more.

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