We understand that a number of hedge funds have been visited recently by the SFC and that others have been asked by the SFC to complete a Questionnaire on Licensed Hedge Fund Managers.
We suggest that hedge fund managers review the Circular to all Licensed Corporations Engaged in Hedge Funds Management Business issued by the SFC on 27 October 2008 as well as its 29 October 2008 Circular to All Licensed Corporations and Registered Institutions Regarding Supervision and Risk Management. We have summarised below the key points of these publications.
Hedge fund managers need to ensure that their internal control procedures are maintained at the level required by the SFC. For these purposes, the SFC does not distinguish between small locally established hedge fund managers and affiliates of large international hedge fund managers. All hedge fund managers need to review their risk management policies and procedures regularly and keep them updated. This is especially the case when market conditions are volatile, when new products or services are introduced, when existing products or services are changed, or when other changes occur which could impact the risk exposure of the operations.
Where possible, the risk management and the compliance functions should be undertaken by independent members of staff who have reporting lines separate from the business functions. Key business functions should also be segregated if possible to avoid potential conflicts of interest.
When providing information to clients, such as newsletters and fact sheets, hedge fund managers should ensure that the information is complete, accurate and not misleading. Transparency for and fair treatment of investors are important. Hedge fund managers should pay attention to investor disclosure requirements relating to side letters, side pockets arrangements and connected transactions.
Before expanding its business operations, a hedge fund manager should ensure that sufficient resources such as personnel, computer and other information technology systems, are in place so that the operations, control and support functions will be able to cope with the business growth. The company's financial capital position should also be monitored closely at all times to ensure ongoing compliance with the financial resources requirements.
Most SFC licensed hedge fund managers are prohibited from holding client assets and providing services to anyone who is not a "professional investor". They also need to have controls and monitoring procedures in place to ensure compliance with these licensing conditions.
None of these are new requirements. The key point is that the systems, policies and procedures should be well documented and supported by records which show that they are being followed.