(April 2007) New mutual fund registration procedures will impact hedge funds in Canada, says one expert. At the same time, the international industry body is promoting new valuation rules to address a growing phenomenon: illiquid investments.
The Canadian chapter of the Alternative Investment Management Association hosted workshops this week for industry, regulators and the media to discuss these topics.
Last week, London-based AIMA published revised guidelines for securities valuation. Less than 23% of all hedge fund assets are difficult to value, says Chris Pitts, a partner at PriceWaterhouseCoopers.
The guidelines cover four broad areas. Fund management bodies should have a valuation policy document that explains the role of the body, the investment manager and the valuation service provider. It should specify who calculates the net asset value, whether the manager plays a role in valuations and what external sources are used. Prices should be based on primary and secondary sources.
This can be crucial when valuing investments such as convertible securities. Because trades are rare, there can be a large difference between the bid and ask prices.
The new recommendation concerns side pockets. It is a holding company in which illiquid investments are segregated until their value is realized.
These pose a problem for investors because redeeming investors may not share in the realization of value, while incoming subscribers may gain exposure at a discount. Therefore, AIMA recommends clearly communicating your side pocket policy to all investors.
The Canadian securities administrators’ registration reform bill, National Instrument 31-103, will also have an impact on Canadian hedge funds, says Michael Burns, general counsel of AIMA Canada and partner at McMillan Binch Mendelsohn.
One of the key provisions is the obligation to register companies offering hedge funds. Investment advisors are already required to register. Although the CSA does not define an “investment fund manager”, it is clear from other securities laws that it refers to persons who direct the activities of a fund.
Hedge funds often take the form of limited partnerships. Burns says the new rule does not specify whether multiple limited partnerships operating as one fund will have to register the same general partner multiple times.
Hedge funds were often offered in Ontario through limited market dealers. The new national facility expands this category nationwide as an exempt market dealer. Exempt market dealers will also have to meet “fit and proper” skills requirements, usually by passing an examination.
Burns also wonders whether the new capital requirement of at least $100,000 would be a barrier for aspiring hedge fund managers.
Posted by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.
(04/02/07)
