From 1 April 2015 hedge funds became collective investments schemes and are now regulated by the Collective Investment Schemes Control Act 2002 (CISCA) and the newly published “Determination on the requirements for hedge funds” published in Board Notice 52 of 2015 by the FSB on 6 March 2015 (as amended) (HF Regulations). Hedge funds are defined so that most existing South African hedge funds, whether formed as trusts, en commandite partnerships or otherwise, are caught by this new regime.
Types of hedge funds
The new regime provides for two types of hedge funds, namely retail hedge funds (RIFs) and qualified investor hedge funds (QIFs).
| Investment requirements | RIFs | QIFs |
| Who may invest? | An RIF is a hedge fund in which an ordinary retail investor may invest. | A QIF is a hedge fund in which only a qualified investor may invest. |
| Minimum investment amount? | There is no minimum investment amount set for RIFs. | Investor must make a minimum investment of R1 million per fund;OR
Investor who has invested less than R1 million per fund, but was an investor in the QIF before 1 April 2015 is deemed a qualified investor. |
| Other requirements | None. | The investor must have either:a demonstrable knowledge and experience in financial and business matters which would enable the investor to assess the merits and risks of a hedge fund investment;
OR appointed a financial services provider who has demonstrable knowledge and experience to advise the investor regarding the merits and risks of a hedge fund investment. |
| Level of regulation | Highly regulated (see part 3 and 4 of the HF Regulations). | Limited regulation (see part 2 and 4 of the HF Regulations). |
Permitted hedge fund structures
The HF Regulations are clear – a manager of a hedge fund, whether the fund is a QIF or a RIF, may only establish a scheme using a collective investment scheme trust arrangement (as contemplated under CISCA) or an en commandite partnership (Permitted HF Structures).
Consequently, debenture structures and vesting trust structures will no longer be permitted and existing structures will have to be migrated across to one of the Permitted HF Structures.
Various practical difficulties relating to the Permitted HF Structures have been raised with the FSB and we are currently communicating with the FSB to deal with these concerns.
Hedge fund role players
Hedge fund managers are required to lodge an application for registration as a manager of a scheme in accordance with Form MA1 by 30 September 2015.
The appointment of hedge fund role players is dealt with in the HF Regulations. The primary role players are the hedge fund manager and the custodian.
| Hedge fund role player | QIF – CIS Trust | QIF – ECP | RIHF – CIS Trust | RIHF – ECP |
| Hedge fund manager | Must be appointed and registered
Governing board to oversee managers’ fiduciary duties |
Must be appointed and registered
Governing board to oversee managers’ fiduciary duties
General partner must be manager |
Must be appointed and registered | Must be appointed and registered
General partner must be manager |
| Custodian | Appoint one or the other or both | Appoint one or the other or both | Must be appointed | Must be appointed |
| Independent fund administrator | Not required – fund administration can be done by manager | Not required – fund administration can be done by manager |
Transitional arrangements for existing hedge funds
All hedge fund managers are required to lodge an application for registration as a manager of a collective investment scheme by 30 September 2015. Managers of hedge funds in existence on 1 April 2015 must comply with the Regulations within 12 months of registration as a manager under CISCA.
Effectively, this means that a manager of an existing hedge fund will have almost 18 months to comply with all the requirements under the regime, i.e. six months for registration as a manager under CISCA plus 12 months thereafter for compliance with the Regulations (i.e. by 30 September 2016).
Tax treatment of hedge funds
Hedge fund structures are accorded the same “flow through” tax dispensation accorded to collective investments schemes (i.e. investors in RIF and QIF will be taxed the same on amounts distributed to them upon 12 months of their accrual or, in the case of interest, their receipt). The relevant tax provisions are contained in section 25BA of the Income Tax Act.
Due to the relative complexity of hedge funds and the recent issuing of the HF Regulations, hedge funds will not qualify as Tax Free Savings Accounts at this stage.
With respect to the tax consequences for the migration of hedge funds from unregulated structures to Permitted HF Structures, the National Treasury has recently released a draft of the Taxation Laws Amendment Bill which proposes significant concessions in this regard.
