South African hedge funds are at risk of regulatory and enforcement action if they do not register as a collective investment scheme in accordance with new legislation, the Financial Services Board (FSB) has warned.

Jurgen Boyd, Deputy Executive Officer at FSB, said: “The development to classify hedge funds as collective investment schemes places the oversight and supervision of these financial products under the jurisdiction of the FSB and operators were given six months to apply for registration as hedge funds.”

In February, the South African Minister of Finance declared hedge funds as collective investment schemes with effect from April 1, 2015.

All South African hedge fund operators are thus required to apply for registration as a hedge fund in accordance with the Collective Investment Schemes Control Act, in order to continue operating.

The Registrar of Collective Investment Schemes is concerned that to date, no application has been received from hedge fund operators, almost three months since the declaration came into effect.

“The closing date for applications is September 30, 2015 and anyone who continues operating hedge funds after this date without authorization will be doing so in contravention of the regulation, and will as a consequence be subject to regulatory and enforcement action by the FSB,” said Boyd.

This Declaration is in line with international practices, and will be reviewed and updated as standards develop, which would include market conduct standards to ensure cost effectiveness and standards on leverage.

“This is a very positive move, for both investors and for the local hedge fund industry, as it now means that South Africa will have one of the most extensive regulations of a hedge fund industry, in the world,” he added.

A tiered approach is adopted by the Determination, with the establishment of two types of hedge funds; one for retail investors and the other for qualified investors.

These two types of hedge funds are regulated differently, with the Retail Hedge Funds (RHF) regulated more strictly than the Qualified Investor Hedge Funds (QIHF), yet with both providing sufficient investor protection.