22 January 2014
Practice Groups:
Investment
Management
Changes to Hedge Fund Disclosure and Reporting
Obligations
By Jim Bulling, Daniel Knight and Julia Baldi
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.
Changes to Hedge Funds Disclosure and Reporting Obligations
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
Valuation
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-todate 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
2
Changes to Hedge Funds Disclosure and Reporting Obligations

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

details of related party relationships and any non-arm's length arrangements
within the structure
3
Changes to Hedge Funds Disclosure and Reporting Obligations

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.
K&L Gates' global presence in many major investment management centres ideally
positions us to assist Australian hedge funds and their global investment managers
respond to the new disclosure challenges outlined in this Legal Insight.
4
Changes to Hedge Funds Disclosure and Reporting Obligations
Authors:
Jim Bulling
Daniel Knight
jim.bulling@klgates.com
+61 3 9640 438
daniel.knight@klgates.com
+61 3 9640 4324
Julia Baldi
julia.baldi@klgates.com
+61 3 9640 4212
Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt
Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto
Paris Perth Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Seoul Shanghai
Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and
South America and represents leading global corporations, growth and middle-market companies, capital markets participants and
entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations
and individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2014 K&L Gates LLP. All Rights Reserved.
5