The potential definition of long/short funds as hedge funds is the main concern under the new regulations, according to Rui Fernandes, senior investment analyst at Lonsec.
Mr Fernandes said the suitability of a product could come into question where ASIC has now defined a product as a ‘hedge fund’ and a client’s risk parameters prohibit sophisticated ‘hedge fund’ or alternative investments.
“Managers are keeping strategies the way they are so if you bought a product for a particular reason, that particular product isn’t going to change, but what is changing is how that product is disclosed and how the strategy is disclosed in the PDS document,” Mr Fernandes told InvestorDaily.
“This could have ripple effects about how [the product] can be used going forward, because if your client doesn’t want a hedge fund and a product is explicitly called a hedge fund, then how is the financial planner going to deal with that?” he said.
The new regulation also creates unexpected competition for long/short funds, Lonsec stated.
Long/short funds have typically been used to manage volatility and offer downside protection. However, quantitative managed volatility equity strategies also provide this downside protection and with considerable less volatility.
Lonsec found these managed volatility products are often cheaper than long/short products in terms of annual fees and performance fees. However, given the short time period these financial products have been offered in Australia investors may still be wary.
“For financial advisers who are using long/short global strategies in client portfolios on the basis of downside protection and lower volatility, managed volatility strategies can offer a compelling after-fee case which may grow stronger in time as track records lengthen,” said Mr Fernandes.
The disclosure requirements for hedge funds are set out in ASIC’s Regulatory Guide 240 and come into effect on 1 February 2014.
