08 October 2008

IOSCO consults on regulatory standards for Funds of Hedge Funds

Following the conclusions of its 2008 report on Funds of Hedge Funds, IOSCO consults on the elaborated “Proposed Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices”, which is aimed at funds of hedge funds’ managers to address regulatory issues of investor protection in light of the increased involvement of retail investors in hedge funds through funds of hedge funds

Elements of international regulatory standards identified include the methods by which funds of hedge funds’ managers deal with liquidity risk, and the nature and the conditions of the due diligence process used by funds of hedge funds’ managers prior to and during investment.

In dealing with liquidity risk the fund of hedge funds’ manager should:

• make reasonable enquiries in order to be in a position to consider if the fund of hedge funds’ liquidity is consistent with that of the underlying hedge funds, particularly in order to meet redemptions;

• prior to investing, and during the investments’ lifetime, consider the liquidity of the types of the financial instruments held by the underlying hedge funds;

• if introducing limited redemption arrangements, consider whether these are consistent with the fund of hedge funds’ aims and objectives. Moreover, their operation should comply with the conditions defined in the proposals; and

• before and during any investment, consider whether conflicts of interest may arise between any underlying hedge fund and any other relevant parties.

Due Diligence processes can be divided up into the following areas:

• Elements requiring constant monitoring and analysis by the funds of hedge funds’ managers:

• Adequate resources, procedures and organizational structures:

• Regularly assess if selection procedures have been properly met; and

• Outsourcing Due Diligence

Deadline for responses is 5 January 2009.

Press release

Consultation paper

© IOSCO