The Swedish Investment Fund Association, Stureplan 6, Stockholm ID THE COMMISSION S CONSULTATION PAPER ON HEDGE FUNDS

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1 The Swedish Investment Fund Association, Stureplan 6, Stockholm ID The European Commission By THE COMMISSION S CONSULTATION PAPER ON HEDGE FUNDS The Swedish Investment Fund Association 1 (below referred to as SIFA) has been given the opportunity to comment on the above-mentioned Commission consultation. SIFA is a member of EFAMA and has taken part in the discussions preceding EFAMA s reply to the consultation. We wish to stress a few points and to describe the system applied in Sweden for hedge funds. Initially, SIFA s wishes to emphasize the importance of determining the aim of an intended regulation. If the intention is to minimise systemic risk the measures would differ from those intended to protect investors. An initial analysis should determine whether the oversight via banks and transparency is sufficient. If there is a need for more supervision the question is what measures would be appropriate given the location of the funds. Investor protection is another issue. If the hedge fund industry wishes to be able to attract retail customers there must be safeguards regarding i.a. custody and information. It is essential that any actions taken by the Commission do not negatively affect hedge funds that have already subjected themselves to satisfactory rules and regulations similar to those of the UCITS-directive, a framework that is considered satisfactory when it comes to regulating and supervising both UCITS and non-ucits. Actions, if any, should aim at hedge funds that are not supervised and should not aim at hedge funds that fulfil already existing rules and regulations. The term hedge fund is not legally defined and entails investments in a variety of assets in which eligibility and strategy of placements differs. Examples from different countries show a range of official supervision and regulation from detailed to non-existing. As a consequence, the market effect, the internal processes and the transparency of hedge funds varies to a large extent. In some areas, the fund industry is highly regulated and subject to official supervision. There are both national and international rules that apply in order to eliminate systemic risks as well as maintain investor protection. The highest 1 The Swedish Investment Fund Association is an association of 36 fund management companies representing approximately 95 percent of the assets on the Swedish investment fund market.

2 developed example of rules is the UCITS-directive and its implementation in some member states for both UCITS and non-ucits funds. For instance, the directive covers internal processes and transparency. Many of the hedge funds have adapted their businesses in conformity with the UCITS-directive. The Commission s work could further clarify that the object of interest is hedge funds that are not directly subject to any official supervision. The purpose of such clarification would be not to make the business difficult conducted by those hedge funds that already actively aim at fulfilling the thorough requirements that apply to the European fund management industry. In Sweden, hedge funds are accessible to retail investors and are governed by legislative measures. There is no specified legal title and hedge funds fall under the category of specialfonder (non-harmonised funds) under the Swedish Investment Funds Act (2004:46). Certain restrictions are allowed for this type of funds; however specialfonder must be open for redemptions at least once a year. A hedge fund that wishes to be classified as a specialfond must apply for exemption from the UCITS investment rules and in the authorization process the Swedish FSA puts particular focus on the fund manager who must have the management experience needed for the type of fund being authorized. In terms of investment limitations, no legislative restrictions other than compliance with a principle of risk-spreading apply for the regulated hedge funds. The documentation of a hedge fund provided or made available to investors is the same as required for UCITS, including simplified prospectus. For specialfonder there are however some additional information requirements. This system protects the unit holders and gives the supervisory authorities insight in the management of the hedge funds Scoping the issues (defining the entities) In Sweden, more detailed information rules apply to specialfonder than to UCITS. Therefore, the description lined out in the consultation that the hedge fund investor base has been confined to institutional or other sophisticated investors, which have led to exemptions by the legislator from many investor protection and disclosure requirements, is not correct as regards the Swedish situation. From a Swedish perspective we would also like to point out that investment strategies that apply to hedge funds are not limited to those that result in a high and systematic use of leverage. As the consultation states, exemptions differ from country to country and for a more adequate description of current hedge funds it would be appropriate to mention that in some countries (such as Sweden) hedge funds are regulated within the investment fund legislation. 2 Including information in the fund rules as to whether the fund is intended for the public or a limited group of investors. The fund rules shall also contain information regarding the extent to which the fund deviates from provisions applicable to UCITS, the risk level sought and the manner in which risks are assessed. See the Swedish Investment Funds Act (2004:46) Chapter 4 8 p. 12.

3 It would also be appropriate for the Commission to conduct a more detailed investigation regarding different types of hedge funds. The consultation exemplifies fund failures and hedge fund managers being forced to divest assets further fuelling declining asset prices. This is applicable not only to this category of funds but to the fund management industry in general (including UCITS) as a consequence of the turmoil in financial markets. Below SIFA gives its response to some of the questions that we deem are of particular importance to our members. Questions: (1) Are the above considerations sufficient to distinguish hedge funds from other actors in financial markets (especially other leveraged institutions or funds)? If not, what other/additional elements should be taken into account? Do their distinct features justify a targeted assessment of their activities? The considerations mentioned would benefit if the following additional elements were taken into account. There are hedge funds whose distinct features justify a targeted assessment of their activities and there are hedge funds whose activities are already regulated in an appropriate and effective way. Should any targeted assessments serve their purpose, the latter must be excluded. The result of a survey as suggested above and/or the decision of the distinct features of the hedge funds will show whether or not a targeted assessment is justified. (2) Given the international dimension of hedge fund activity, will a purely European response be effective? To a large extent, previous European actions have proven to be effective and - in the case of UCITS - set as a golden standard also outside the EU. The UCITS brand stands for a high level of investor protection. As a consequence, investment managers all over the world refer to UCITS and consider its frame to be suiting fund management. However, the measures that now are to be taken should be viewed in the traces of the turmoil in financial markets ( G-20 objective to ensure that all financial market products and participants are regulated or subject to oversight, as appropriate to their circumstance ). With this in mind, we would like to attach great importance to the fact that measures must also be taken outside the EU and within the U.S. and other relevant countries, since this is not (only) a EU problem. Given that many hedge funds are registered outside, but distributed within, the EU, attention should also be paid to the fact that the rules on distribution of hedge funds differ in respect of the type of vehicles that may be distributed.

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5 4. Management of micro-prudential risks From our perspective, when evaluating the market impact of high net outflows in hedge funds in stressed conditions, the key is not the characteristics of the investor base as pointed out in the consultation. During the current turmoil in financial markets, the selling of fund-units has been considerable not only from retail investors but also and probably more importantly from institutional investors (who represent a larger base of investors). 5. Transparency towards investors and investor protection In the consultation the disclosure practice of hedge funds is described as driven largely by contractual arrangements between the funds and their investors when, as is typically the case, hedge funds are distributed directly to professional investors. It is our view that this does not apply to all hedge funds but would generally apply to the non-regulated private equity-fund industry. Questions: (10) Do investors receive sufficient information from hedge funds on a pre-contractual and ongoing basis to make sound investment decisions? If not, where do the deficiencies lie? What regulatory response if any is needed to complement industry codes to make a significant contribution to the transparency of hedge fund activities to their investors? As described above, in Sweden hedge funds (i.e. specialfonder) are subject to the same information requirements as UCITS funds. (11) In light of recent developments, do you consider it a positive development to facilitate the access of retail investors, subject to appropriate controls, to hedge fund exposures? Yes, especially due to the fact that some hedge funds are regulated and as long as there is sufficient transparency and information to the investors, in order for them to properly understand their investment. THE SWEDISH INVESTMENT FUND ASSOCIATION Eva Broms Emelie Antonisen