Super funds investing in hedge funds are to be scrutinised by the Australian Prudential Regulation Authority (APRA) after it found many trustees are clueless when it comes to this investment class.
The regulator will be grilling trustees to justify the use of hedge funds within their investment objectives, and will check that they take due diligence and have adequate information on investment performance.
Following a review of 200 funds, representing 28 per cent of total super industry assets, the regulator is concerned about their apparent uncertainty over the nature of hedge fund exposures.
It found many respondents were unable to clearly specify the investment strategy being employed by their respective hedge fund managers.
APRA has already warned trustees about uninformed use of hedge funds and will now hold discussions with superannuation funds that have sizeable hedge fund investments.
The reviews will start with funds that have the biggest hedge fund allocation and work their way down, according to APRA’s general manager, specialised institutions division, Wayne Byres.
The regulator will check there is a good reason for the investment, and request an explanation over their particular choice of fund and manager, and how they are satisfied the manager is reputable and reliable.
It will also check what reporting the fund receives on investment performance, how this performance is monitored, and will ensure the fund meets reporting obligations, says Byres.
If a fund is found to be underperforming, APRA will take steps to negotiate improvements, including examining its investment strategy and future processes. If there is evidence of negligence, or the fund is acting out of members’ interests, formal enforcement will be taken.
The APRA survey shows 15 per cent of surveyed trustees make hedge fund investments. This totals $1.25 billion, which Byres says is an insufficient level.
Those trustees investing in hedge funds report that the asset accounts for just over four per cent of portfolios, the minority saying hedge funds represent over 10 per cent.
Trustees split their hedge fund investments between two managers, while overall, 48 different hedge fund, or fund-of-fund managers are used by the funds.
