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Hedge funds and other complex leveraged funds classified under Category II of Alternative Investment Funds (AIF) will now have to follow leverage limit caps, SEBI said on Monday. They should also have a comprehensive risk management framework and a strong compliance function according to their size, complexity and risk profile, the market regulator said in a circular.
Category III funds employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. These include hedge funds or funds which trade with a view to make short-term returns.
The leverage position for a Category III AIF shall not exceed two times, i.e., the gross exposure after offsetting for hedging and portfolio rebalancing transactions shall also not exceed two times of the NAV of the fund.
In case of breach of leverage limit, the fund would be required to send a report to all its clients before 10 a.m. on the next working day stating that there is a breach in the limit along with reasons for the same. It would also be required to square off the existing exposure and bring down the leverage by the end of the next working day.
These funds would also have to maintain appropriate records of their trades and provide full disclosure of their trade management practises and any conflict of interest to the market regulator SEBI through submission of regular reports on their activities. While Category III AIFs which undertake leverage would need to submit a monthly report to SEBI, others who do not undertake any leverage can, however, submit such reports on a quarterly-basis.
These directions have been made through its ‘Operational, Prudential and Reporting Norms for Alternative Investment Funds (AIFs)’, which were introduced by the regulator last year as a separate product class.
Regarding redemption norms, SEBI has barred any suspension on redemptions for open-ended Category III AIFs except in the case of exceptional circumstances or for regulatory compliance. Both the regulator as well as investors are to be kept in the loop on the fund’s actions during the time of suspension, added the circular. These redemption norms would apply to open-ended Category-III AIFs for all their existing and new schemes.
manisha.jha@thehindu.co.in
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