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IOSCO publishes standards for funds of hedge funds

Date: Saturday, September 19, 2009
Author: Advisor.ca

The International Organization of Securities Commissions (IOSCO) has published standards for funds of hedge funds (FoHFs) regarding liquidity risk and due diligence.

IOSCO says FoHF managers should "make reasonable enquiries" to consider whether the FoHF's liquidity was consistent with underlying funds. It also says managers should take into account the liquidity of various financial instruments held by the underlying funds as well as whether any limited redemption arrangements were consistent with the FoHF's own redemption terms. Managers also need to address any potential conflicts of interest.

Due diligence processes should be carried out both before and during an investment, according to IOSCO. FoHFs should also regularly review their due diligence processes and have a "documented and traceable" procedure for selection of hedge funds, together with the necessary resources for implementing a procedure.

If a FoHF plans to outsource due diligence, it should make sure any conflicts of interest are adequately addressed.