Hedge Fund Flexible Approach to Authorisation Policy

Summary

This is a policy statement from the Guernsey Financial Services Commission (GFSC) explaining how it applies flexibility and rule waivers when authorising hedge funds and funds of hedge funds under the Class B and Class Q (Qualifying Professional Investor) fund rules. It does not create new binding rules itself but sets out the criteria and conditions under which the Commission will consider waivers from custody, valuation and client money requirements.

• Custody and prime broker arrangements: For institutional and expert investor hedge funds, the Commission may waive the requirement for a locally licensed custodian and allow a suitably regulated prime broker to act as custodian without formal oversight duties or physical asset segregation, provided risks are prominently disclosed. For retail and less sophisticated investor funds, a traditional custodian with oversight of the manager is normally required, though partial waivers are possible if assets are held by an appropriately regulated prime broker with clear segregation and full disclosure.
• NAV and share price estimation: Funds facing difficulty calculating NAV promptly may use preliminary NAV estimation for subscriptions and interim redemptions if fully disclosed and demonstrated to be robust. Retail focused funds must ensure any overpayment risk on redemption is remote and, if it occurs, is reimbursed by the manager or investment adviser rather than borne by the fund.
• Client money rules waivers: Where NAV estimation delays the allotment of shares, the Commission may waive relevant Licensee Client Money Rules to permit release of subscription monies, subject to satisfaction as to the robustness of the estimation process.
• Governance expectations: The Commission expects an enhanced oversight role for fund Boards of Directors, investment advisers and asset allocators to ensure hedge funds and funds of hedge funds remain within disclosed investment strategies and comply with offering documents and applicable rules.

The policy applies to Guernsey domiciled open ended hedge funds and funds of hedge funds authorised or seeking authorisation under the Class B and Class Q rules, and to their managers, administrators, custodians and prime brokers. Any waiver arrangements must be clearly and prominently disclosed in the fund's offering document, and applicants seeking flexibility should engage with the Commission's Investment Fiduciary and Pension Division.

Key obligations

• Fund offering documents relying on custody or prime broker waivers must clearly and prominently disclose the risks of the arrangements
• For institutional and expert investor funds using prime broker custody waivers, arrangements must ensure disclosure of lack of physical asset segregation and lack of formal oversight duties
• For retail-targeted funds, prime brokers must provide clear segregation of fund assets exceeding collateral requirements, ensuring surplus assets are protected on prime broker failure
• Applicants using NAV estimation procedures must demonstrate to the Commission that the estimation process is robust and disclose the approach and risks in fund documentation
• For retail-targeted funds using NAV estimation, any overpayment on redemption must be reimbursed to the fund by the manager or investment adviser responsible
• Funds seeking a waiver from Licensee Client Money Rules due to NAV estimation delays must satisfy the Commission as to the robustness of their estimation procedures before such waiver will be granted

Applies to

hedge funds, funds of hedge funds, Class B funds, Class Q (Qualifying Professional Investor) funds, fund managers, fund administrators, custodians, prime brokers, Boards of Directors of funds, investment advisers