Thanks in part to the Madoff scandal still unfolding in the United States, the Ontario Securities Commission has launched a focused compliance review of hedge funds. Managers of hedge funds, including many registered investment counsel and portfolio managers (ICPMs), have been asked to complete a detailed questionnaire on an expedited basis, with a return date of February 20, 2009.
In contrast to the review of hedge funds completed by the Canadian Securities Administrators in 2007, the OSC’s current review covers more market participants and can be expected to delve more deeply into the structure and operation of hedge funds. Staff define hedge funds for the purposes of the questionnaire as being “investment pools that use alternative investment strategies not generally available to traditional mutual funds, such as taking both long and short positions and using arbitrage, leverage, options, futures, bonds and other financial instruments to capitalize on market conditions. This definition also includes fund of funds”.
The questionnaire asks for information on the numbers of unitholders in each fund, including whether or not those unitholders are retail or institutional, and the percentage of those unitholders that are Ontario residents. Staff also focus on the service providers to hedge funds and their managers, the history of subscriptions and redemptions over the past 18 months, portfolio holdings for each hedge fund, counterparty exposure, valuation of hedge fund assets, and performance. Staff specifically ask whether the hedge funds invested in Madoff-managed funds.
It is clear that staff’s questionnaire is merely the first step in the OSC’s efforts to ensure they are on top of the hedge fund industry in Canada. Staff are looking for “red flags” that would justify further investigations of a hedge fund operation and will follow-up with selected market participants to carry out on-site compliance reviews.
Managers of hedge funds should ensure that they complete the OSC’s questionnaire in a timely manner providing complete and accurate information in response to the questions. It is vital that managers also ensure that their compliance procedures, including their written policies and procedures, are up-to-date, accurate and reflect current regulatory expectations.
For a primer on regulatory expectations for hedge fund managers, please click here for BLG’s Registrant Regulation and Compliance Alert Hedge Fund Managers: Time for Your Annual Checkup? Quick Tips on Doing a Self-Diagnosis.