AUSTRALIA - The Australian Prudential Regulation Authority (APRA) has warned the superannuation industry about its concerns over the use of hedge funds as an investment choice.
APRA general manager, Wayne Byres, said that hedge funds were growing in popularity because they ostensibly offer the potential for greater diversification in asset classes and absolute returns for less risk at a time when market returns were down.
“What is becoming obvious, however, is that 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 said.
“Events in the late 1990s have shown that even the most carefully constructed investment strategies are not fool-proof and significant losses can be generated in a relatively short space of time where large, illiquid positions are involved.”
APRA’s main concerns are that hedge funds rely heavily on a single strategy, with broad delegations for the use of gearing and derivatives, and on a single individual to execute the investment management process; and are characterised by relatively short trading history and/or an absolute return rather than a benchmark return.
“APRA expects trustees to address a number of issues and analyse the risks inherent from an investment perspective before taking the decision to allocate a percentage of a portfolio into a hedge fund,” Byres said.
“If APRA is not satisfied that an investment in hedge funds is to the benefit of fund members, it will step in to protect their interests,” he said.
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