On 25 February 2015, the Minister of Finance declared under Section 65 of the Collective Investment Schemes Control Act, 2002, the business of a hedge fund to be a collective investment scheme and the provisions of the Collective Investment Schemes Control Act Applies.
It was further decided on 06 March 2015 that the requirements for hedge funds would be sourced via Board Notice 52 of 2015. However, BN 52 does not specifically cater for feeder funds with specific requirements. A feeder retail hedge fund is essentially a collective investment schemes that invest in another offshore hedge fund. In terms of FSCA Communication 5 of 2024 (CIS), a retail feeder hedge fund portfolio means “a portfolio of a retail hedge fund that is established solely for the purpose of investing in a single portfolio domiciled in a foreign jurisdiction”.
In line with BN 52, retail hedge funds are currently subject to the condition that allows for an investment of a maximum of 75% in any one portfolio, and this would effectively also apply equally to a feeder retail hedge fund.
The reason for the 75% limit is to provide for a limit of any ‘standard’ hedge fund investing in other hedge funds. The FSCA has noticed that the 75% restriction has been a challenge for certain retail hedge funds wishing to establish feeder funds, this is because BN 52 creates a restriction that inhibits a feeder retail hedge fund from investing 100% in a single offshore hedge fund.
The FSCA did not envisage that BN52 would exclude the establishment of a feeder retail hedge fund as a portfolio style or type and that the limit would have the effect of prohibiting it. It is acknowledged that feeder funds are an industry norm internationally and should be available in the spectrum of portfolio offerings. The FSCA has also received several requests from CIS managers for an exemption due to this challenge.
Consequently, from 23 February 2024, the FSCA closed this gap by exempting managers of retail hedge funds from complying with the 75% exposure limit as set out under BN 52, insofar as it relates to feeder retail hedge funds.
This exemption is considered to be beneficial to investors and the public as collective investment feeder funds are a normal existing product style that provides domestic investors access to foreign CIS funds. Creating an enabling environment for feeder retail hedge funds is positioned to further expand investor options in the feeder funds context and enable managers to evolve their investment offerings.
Any further queries can be directed to the FSCA Regulatory Frameworks Department by emailing Nkateko.Dau@fsca.co.za or Annelize.slabbert@fsca.co.za.