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Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002)

Board Notices

Determination on the requirements for hedge funds

Part 3 : Retail Hedge Fund

14. Exposure

 

(1) A manager may only include securities and assets in a portfolio in accordance with the limits set out in Annexure A to this Notice.

 

(2) A manager may create leverage in a portfolio by borrowing funds, using short positions or by engaging in derivative transactions with counterparties.

 

(3) A manager may calculate the portfolio's total exposure and leverage by either—
(a) the value-at-risk approach; or
(b) the commitment approach.

 

(4) A manager must be able to demonstrate that the risk assessment methodology it uses for a portfolio is appropriate for that portfolio and there must be consistency in the choice of approach used.

 

(5) A manager using the commitment approach when calculating exposure must ensure that a portfolio's total exposure to the market does not exceed 200 per cent of the total net asset value of the portfolio.

 

(6)

(a) When calculating the exposure using the value-at-risk approach, all the positions of the portfolio must be considered.
(b) A manager must always set the maximum value-at-risk limit according to a portfolio's defined risk profile.
(c) A manager must ensure that the value-at-risk model—
(i) is appropriate for the relevant portfolio or portfolios of the retail hedge fund and takes into account the investment strategy being pursued and the types and complexity of the securities and money market instruments used;
(ii) takes into account the general market risks;
(iii) is supported by appropriate back-testing and stress-testing of the portfolio that allows for, inter alia, a comparison to expected loss, and where—
(aa) a one day change in portfolio value exceeds the related one day value-at-risk measure, the model must be adjusted; and
(bb) the event described in subparagraph (aa) occurs more than four times in the most recent 250 business days, the manager must without delay report this to the registrar, who may take measures and apply stricter criteria for the use of value-at-risk.

 

(7)

(a) When using the commitment approach in a portfolio, all derivatives must be converted into the effective exposure of an equivalent position in the underlying asset of the derivative contract.
(b) Where the commitment approach is used, a manager must apply this approach to all derivative positions, whether used as part of the portfolio's general investment policy, for purposes of risk reduction or for the purposes of efficient portfolio management.
(c) Where the commitment approach is used, a manager may consider hedging and netting arrangements, provided they fulfil the criteria relating to the commitment approach.
(d) Hedging arrangements must—
(i) ensure that there is a verifiable reduction of risk;
(ii) relate to the same or similar asset class;
(iii) be efficient in stressed market conditions.
(e) Netting arrangements—
(i) may only include those derivative trades which offset the risks linked to other trades on the same underlying asset, leaving no material residual risk;
(ii) must be effected within specific maturity segments in respect of interest rate securities.

 

(8) When calculating exposure of a security that contains exposure to another security, a manager must separate the security into its individual underlying exposure components.