APRA urges caution on hedge funds

The Australian Prudential Regulation Authority (APRA) has warned of concerns it has over the choice of hedge funds as investments.

APRA says the weakness with hedge funds is that they rely heavily on a single strategy, usually executed by a single individual and often involving the use of gearing and derivatives.

The regulator also says hedge funds are characterised by a short trading history and an absolute rather than benchmark return.

APRA general manager Wayne Byres says hedge funds are becoming popular because they potentially offer diversification and absolute returns for less risk in down markets.

“But what is becoming obvious is while some hedge funds are professionally managed and regulated, they can still lead to significant losses in a relatively short space of time, particularly where gearing is used,” he says.

APRA says it investors to analyse the risks before taking a decision to allocate a percentage of a portfolio to a hedge fund.

Investors should insist on disclosure by hedge fund managers on areas such as there short and long positions, the number and value of their positions, the level of gearing used and the robustness of the fund’s resources and risk management systems.

Byres says investments in funds that cannot provide this information should be seriously reconsidered.

APRA says, where superannuation trustees are concerned, it may step in to protect the interests of fund members if is not satisfied with the nature of hedge fund investments.