1. The collapse of Trio Capital demonstrated the way in which hedge funds and funds of hedge funds can be overly complex, unclear and lacking in transparency, particularly for retail investors. a. Briefly summarise what has happened in the case of Trio Capital last year in 2012 in Australia
The collapse of Trio Capital is the biggest superannuation fraud in Australian history. Trio Capital was the trustee of a numbers of super funds governed by the APRA (Ryan, S., 2011). It also had a number of managed investment schemes, like ARP Growth Fund and Astarra Strategic Fund. An American lawyer, Jack Flader, controlled the hedge funds in the Caribbean in behalf of the company with the $180 million from Trio Capital’s schemes (Ryan, S., 2011). When those funds collapsed, Australian investors funds disappeared. The company had very poor corporate governance, and at least one of the directors had fraudulent conduct and has gone to jail (Ryan, S., 2011). Liquidators have record $300 million assets, but more than $ 200million are still missing (Ryan, S., 2011). More than 6000 investors lost money and some of them lost their entire retirement savings (Ryan, S., 2011). And 5000 of those investors share $55 million taxpayer-funded levy to compensate the loss (Ryan, S., 2011). However more than 600 investors will not get any compensation because the hedged funds they invested were self- managed and not governed by the APRA (Ryan, S., 2011).
2. Discuss the regulations that were in place with regard to hedge funds in Australia and what the changes that are in place are.
Firstly, Lacking of universal definition of “hedge funds” has been a problem. Hedge funds have five unique characteristics defined by the regulations. According to Class Order [CO 12/749] Relief from the shorter PDS regime, a responsible entity using expression of “hedge funds” must exhibit two or more characteristics from the following list: (i) Use of investment strategies intended to generate returns with low correlation to equity and bond indices and/or complex investment structures (ASIC, 2012) (ii) Use of leverage to increase returns (ASIC, 2012);
(iii) Use of derivatives for speculative purposes (ASIC, 2012); (iv) Use of short selling (ASIC, 2012); or
(v) Performance fees (in contrast to fees based on funds under management (FUM)) (ASIC, 2012).
However, after the scale collapse of Trio Capital and other funds, hedge funds mangers might try to avoid labelled as hedge funds due to poor reputation.
Secondly, improving disclosure promote more efficient capital market, help disclosure relevant information, reduce the possibility of omitting important information, concentrated on the information need of the investors, and be flexible to adapt investors’ information needs changes (ASIC, 2012). Under Corporations Act.3 Pt 7.9 requires the Product Disclosure Statement need to be prepared to the offer of interests, and ongoing disclosure obligation and requirements on advertising and publicity for the offer of interests(ASIC, 2012) .
In detail, PDS must:
(a) Be worded and presented in a clear, concise and effective manner (s1013C(3)) (ASIC, 2012); (b) Make specific disclosures (s1013D), including among other things about the significant risks associated with holding the product (ASIC, 2012); and (c) Include all other information that might reasonably be expected to have a material influence on the decision of a reasonable person (when investing as a retail client) about whether or not to invest in the product (s1013E) (ASIC, 2012).
In addition, Ch 5C has further requirements on hedge funds, including the registration need to be label as a managed investment scheme operated by a responsible entity which holds an Australian financial services (AFS) licence, and to have a scheme constitution and compliance plan (ASIC, 2012).
3. Describe the roles of investment banks and merchant banks,...