The Australian Prudential Regulation Authority (APRA) today announced that it has asked a number of superannuation fund trustees to provide information on the current level of funds held in alternative investment classes, specifically hedge funds.

Speaking in Sydney at the Australian Institute of Superannuation Trustees (AIST), Mr Wayne Byres, APRAs General Manager  Specialised Institutions, said that the regulator wanted more clarity about the extent to which money was being invested in hedge funds and to also identify any particular concentration of investments or patterns across the industry.

APRA recently issued a warning to trustees on the prudent use of alternative investments, in particular hedge funds. Its main concerns are that hedge funds are historically investment vehicles targeted to professional investors in the retail market searching for higher risk/return and were not necessarily designed to accommodate the prudential and other regulatory requirements relating to superannuation.

Despite either ill-informed or deliberately deceptive comments coming from some members of the hedge fund industry, APRA did not say that trustees should not invest superannuation monies into hedge funds, Mr Byres said.

What APRA did stress is that investment decisions need to be informed. Trustees must be able to demonstrate that they have performed the fiduciary duties that are imposed on them to act in their members best interests. They cannot demonstrate this if they are making investments without important relevant information.

Mr Byres said that APRA acknowledged that hedge funds and other alternative investments can play a valuable role in a diversified superannuation portfolio, and is working with the hedge fund industry association to develop more guidance for superannuation trustees on obtaining relevant information from hedge funds.

The exact form of this guidance is still to be resolved. For example, it could be via an extension to the risk management strategy (RMS) framework that applies to derivatives. But the clear intention is to assist trustees to make more informed decisions, rather than trying to limit or otherwise restrict the investment activities of trustees.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.  It currently regulates $1.5 trillion in assets for 20 million Australians.