The FSCA has lifted the investment cap on retail feeder hedge funds, permitting them to allocate fully to a single offshore hedge fund.
The decision is in response to numerous requests from managers of retail hedge funds whose ability to establish feeder hedge funds has been hindered by the investment limit in Board Notice 52 of 2015 (Determination on the requirements for hedge funds).
Paragraph (a) of Table 5 of BN 52 states that where a retail hedge fund invests in other portfolios, the investment in any one portfolio may not exceed 75% of the market value of the portfolio.
“The purpose of the 75% limit is to provide in general for a limit of any “standard” hedge fund investing in other hedge funds. When the 75% limit was determined, feeder retail hedge funds were not specifically contemplated in its application,” the FSCA said in Communication 5 of 2024 (CIS), which was published last week.
The Authority said it did not envisage that BN 52 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 therefore exempted 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.
The exemption is contained in CIS Notice 2 of 2024 (Exemption of managers of collective investment schemes from certain requirements in Board Notice 52 of 2015).
The Notice defines a “retail feeder hedge fund portfolio” as “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”.
The exemption is subject to the retail feeder hedge fund portfolio complying with the requirements for a feeder fund portfolio set out in Chapter IV of Board Notice 90 of 2014 (Determination of securities, classes of securities, assets or classes of assets that may be included in a portfolio of a collective investment scheme in securities and the manner in which and the limits and conditions subject to which securities or assets may be so included).
“This exemption is deemed to be beneficial to investors and in the interest of 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 will therefore further expand investor options in the feeder funds context. It will also enable managers to broaden their investment offerings,” the FSCA said.
The exemption took effect on 23 February.
For more information about the exemption, contact the Authority’s Regulatory Frameworks Department by emailing Nkateko.Dau@fsca.co.za or Annelize.slabbert@fsca.co.za.
