Buying and selling - The Chin Family (2024)

Portal-Investment

Article

All investments carry risks and hedge funds are no exception. It is therefore important to fullyunderstand the nature of the hedge fund and the risks involved before making an investment decision.

A fund's offering document, commonly known as a prospectus or an explanatory memorandum, provides a detailed roadmap to potential investors. It covers everything from the fund's objectives, investment strategies and restrictions, management style, risk factors, all fees payable, to details of its operations and dealing procedures.

With hedge funds, the front cover of its offering document is required to carry prominent risk warning statements specific to the fund.

All hedge funds that are offered to the public must first receive authorization from the SFC.

SFC authorization means that certain structural and disclosure requirements have been met, such as the eligibility of the fund manager / custodian / trustee and the relevant information and on-going reporting requirements.

SFC authorization is not a seal of recommendation, and does not mean the hedge fund is a "sure-win" product. It is important that you read the offering documents and make your own, careful checks before making an investment decision.

Different types of hedge funds have different minimum subscription thresholds:

• Single hedge funds =====> US$50,000
• FoHFs =====> US$10,000
• Hedge funds with a capital guarantee feature =====> no limit

Note that the liability of investors must be limited to their investment in the fund.

Similar to those of traditional funds, the fees and charges levied by a hedge fund usually include a front load sales charge paid out of your subscription proceeds. These are followed by management fees, trustee or custodian fees, administration fees etc., all of which are levied on an annual basis and directly taken out of the assets of the fund. Other fees that are directly charged to the fund are establishment costs, auditor fees, brokerage commissions, and other out-of-pocket expenses. Some hedge funds may also have a back-end redemption charge.

One important difference from a traditional fund is that many hedge funds also charge a performance fee, which normally is a percentage share of the return on the fund.

The SFC requires that performance fees can only be charged on a "high-on-high" basis, i.e. only when the fund has achieved absolute improvement in returns by consistently outperforming its previous "all time high" in terms of net asset value per unit. Moreover, the fee can only be levied annually or on a less frequent basis. You can find information about the calculation methodology in the fund's offering document.

The above high-on-high and frequency requirements, however, do not apply to the underlying funds of a FoHFs. The fund's offering document needs to clarify if the performance fee is levied at both the whole fund and the underlying funds levels. It should also summarize the bases of how performance fees are calculated and paid by the underlying funds.

Since the FoHFs manager performs additional service in selecting the underlying funds and monitoring their performance on an on-going basis, a FoHFs has an extra layer of fees - one at the parent level and one at the underlying funds level.

However, where a FoHF invests in underlying funds managed by the same management company or its connected persons, all initial charges on such underlying funds are waived. Moreover, neither party may retain a rebate (whether in cash or in kind) on any fees or charges levied by such underlying funds, their management company or any of the connected persons. The offering document needs to disclose the aggregate amount or give an indicative range of all the fees and charges of the FoHFs and each of its underlying funds.

Like traditional funds, hedge funds need to publish their latest bid and ask prices or NAV in one Chinese and English newspaper. You can find the names of the newspapers in the offering document.

It is the fund manager's responsibility to ensure a fair valuation of a hedge fund. The valuation agent appointed must have sufficient experience and know-how in dealing with hedge funds. The valuation should be done in generally accepted accounting standards and in line with industry's best practices. The fund is obliged to disclose clear information about the identity of the valuation agent, its qualifications, the particulars of the valuation method and frequency.

Where a hedge fund holds inactively traded assets, they may cast uncertainties and impose adverse impact on the fund's valuation.

For most hedge funds that advertise themselves as 'capital guaranteed', a proportion of the investors' monies is placed in relatively low-risk fixed income securities like bonds, in the expectation that on maturity of these securities the original investment will be fully repaid together with interest by the issuer. However, depending on the credit worthiness of the issuer, the interest rate environment and the liquidity profile of the securities, full repayment is not necessarily attained. Your capital protection is dependent on the guarantor's ability to pay. As a general rule, in order to enjoy the capital guarantee, you need to keep your investment in the fund until maturity.

You should refer to the offering document for details regarding all terms and conditions that affect the validity of the guarantee and other specific risks of the investment such as liquidity risk, inflation risk and so on.

Yes, you can lodge your redemption request anytime. However, some hedge funds only have dealing days once a month and the time taken to realise the redemption proceeds may be much longer than that for a traditional fund. The maximum interval between your lodgment of a properly documented redemption request and the payment of the redemption money to you can be as long as 90 calendar days. This means even if you need money back badly, you have to wait for that long.

You should also note that some hedge funds have exit penalties, i.e. a redemption charge depending on the length of time you have stayed in the fund. In addition, for hedge funds that offer a guarantee at maturity, the guarantee may not apply if you redeem your holdings before maturity. Therefore, consider your liquidity needs carefully.

Hedge funds are not for everyone. The same investment basics apply to hedge funds as to traditional funds. You must consider your own financial circ*mstances and understand the special nature of hedge funds and the risks involved before you make your investment decision.

Do not simply reply on a hedge fund's past performance when making your choice. There is no guarantee that past winning funds will continue their success. Track records are for reference only. They are not guarantee of a fund's future performance.