Research house Lonsec is urging financial planners to review their clients’ equity portfolios and ensure that any long/short funds are properly classified as hedge funds ahead of enhanced disclosure requirements on February 1, 2014.
The Australian Securities and Investment Commission’s Regulatory Guide 240 was slated to take effect from May 2013, however, was postponed to February next year to allow for further consultation between the regulator and industry players.
It’s likely that long/short funds will be captured within the definition of a hedge fund under RG 240, which would have ripple effects, said Rui Fernandes, Lonsec senior investment analyst.
“Firstly, there is the potential for platforms to revisit their own categorisation of products, which could have an impact on how products are used by financial advisers,” he said.
“Secondly, this is likely to touch on the day-to-day relationship between financial advisers and their clients. The suitability of a product within a client’s portfolio 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.”
Lonsec classifies long/short funds as hedge funds and believes the regulator’s move is positive.
Financial advisers commonly include long/short funds as part of their clients’ allocation to equities, as opposed to their allocation to alternative investments.
Fernandes said this was because of the flexibility that most long/short strategies had in terms of varying their equity market exposure and using a range of sophisticated techniques to dampen risks.
His comments follow the recent release of Lonsec’s Long/short Global Equities Sector Report, which reviewed 16 financial products. The report included two new funds: the Morphic Global Opportunities Fund, which received an investment-grade rating; and the Platinum International Health Care Fund, which was awarded a recommended rating. The review saw two funds have their rating upgraded while six funds were downgraded, with the remainder unchanged.
The review also looked closely at the emerging asset class of quantitative managed-volatility equity strategies, which have been accessible to institutional investors for some time but more recently been made available to wholesale/retail investors.
The managed volatility products reviewed by Lonsec were cheaper than the long/short offerings, both in terms of ongoing annual base management fees and performance fees, Fernandes said.
“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,” he said.
What is a hedge fund? Is Platinum a hedge fund? Is a fixed interest fund that hedges currency risk a hedge fund? Is a bank hybrid debt or equity in disguise?
I think some thought to the definitions is required before too many rules are made.
Approved