(Prepared by Hong Kong Investment Funds Association)

For comparison of a fund of hedge funds with a traditional fund of funds, please refer to Table 2.

Note: The table only represents general observations. Investors should read the prospectus and other relevant documents before they subscribe into a fund.

	Traditional Unit Trusts/Mutual Funds	Hedge Funds
Name of the fund	At least 70% of non-cash assets in securities and other investments to reflect the particular objective/market/geographic region.	At least 70% of non-cash assets to pursue the particular objective/market/geographic region.
Investment strategies	Usually more restricted, e.g. for general types of funds: Mainly long only Very limited leverage Very limited use of derivatives Usually more well-diversified (For details see "Investment restrictions" below) Traditional funds generally tend to correlate more to the movement of the markets than hedge funds.	Relatively more flexible. Each hedge fund is unique. The term "hedge fund" covers a broad spectrum of strategies, e.g.: Can employ both long and short strategies Moderate to high usage of leverage Moderate to high usage of derivatives Less diversified, & more focused A large number of strategies used have little correlation with the movement of the equity markets.
Regulated by	SFC, according to the Code on Unit Trusts/Mutual Funds	Ditto
Minimum subscription	No minimum set by the Code, only set by individual fund houses - varies, usually around US$1,000-US$2,000.	Single strategy hedge funds: US$50,000 Funds which provide at least a 100% capital guarantee: no minimum
Dealing	At least one day per month (in practice, most funds deal on a daily basis)	Ditto (likely that most funds will deal on a weekly or even monthly basis)
Payment of redemption money	30 calendar days (In practice, redemption money will be paid out in 5-7 working days - assuming documents are complete.)	90 calendar days (in practice, it may take a few weeks before redemption money is paid out)
Maximum loss of an investor (for risk warning, see "disclosure")	Limited liability, i.e. limited to their investments in the scheme.	Ditto
Performance fees Calculation/payment Disclosure	"High-on-high" and "annual payment" Need to disclose how fees are calculated and paid	Same principles Ditto
Valuation	Valued and priced in accordance with the provisions of its offering documents.	Basically follows the same principle, in addition: the assets should be valued on a regular basis according to generally accepted accounting principles and industry's best practices. (This applies because some hedge funds may deal less frequently than daily while most traditional funds are dealt on a daily basis.) disclose the full particulars of the valuation frequency, methods and the identity and qualification of the valuation agent.
Disclosure Materials to be supplied Risk warning	An up-to-date offering document, which should contain the information necessary for investors to make informed decisions Annual report + semi-annual report General and/or specific (for specialized schemes)	Ditto + additional disclosure requirements in the front cover, advertisements and application form. Ditto + a quarterly narrative report Specific warnings: Risks are not typically encountered in traditional funds Has special risks which may lead to substantial or total loss of investment The redemption price may be adversely affected by the fluctuations in value of the underlying investments during a relatively long redemption period The net asset value may be adversely affected because some of the underlying investments may not be actively traded and there may be uncertainties in valuation
Requirement of the fund manager	Certain requirements prescribed, e.g. on financial resources, experience, internal controls, human and technical resources etc.	Basically assess the same factors, in addition: at least 2 investment executives, each have 5 years' general experience in hedge fund strategies, incl. at least 2 years' experience in the same strategy as the proposed hedge fund; hedge fund assets under management: at least US$100 million should have suitable internal controls and risk management systems
Investment restrictions Principle	Must adhere to clearly laid-down investment and borrowing restrictions with the purpose to keep the scheme's assets liquid and diversified. e.g   Concentration: up to 10% of its total net asset in one company   Not exceed 15% of its total net asset in unlisted securities   Derivatives: generally not more than 15% of its total net asset not for hedging purpose   Short sell: should not result in the fund having liability exceeding 10% of its total net asset   Borrowing: not more than 25% of its total net asset	Follows largely a "disclosure" approach without any investment and borrowing restrictions imposed by the SFC - a hedge fund would be required to clearly disclose a set of self-imposed investment and borrowing restrictions, (including the maximum limit on leverage) in the offering documents
Independent trustee to safekeep assets of the underlying funds	Yes	Yes
Investment management operations	The investment management operations of a fund management company or those of the investment adviser should be based in a jurisdiction with an inspection regime acceptable to the SFC.	Basically follows the same principle. In addition: it may be necessary to consider the acceptability of an inspection regime on a case-by-case basis because of the different regulatory treatment of offshore versus onshore hedge funds.
Appointment of representatives and agents	Must have a Hong Kong representative, which must be appointed if the fund management company is not incorporated and does not have a place of business in Hong Kong.	Basically follows the same principle, in addition: the manager must have a due diligence process for appointing its representatives and agents (e.g. administrator, custodian, prime broker).
Appointment of selling agents	Selling agents are subject to: SFC Fit and Proper Criteria SFC Code of Conduct for Registered Persons	Basically follows the same principle, in addition: take reasonable care in selecting distribution agents, provide necessary information and training to the agents.
Appointment of prime brokers	No specific provisions	Specific requirements, e.g. on financial resources, segregation of assets and limits on charging of assets.

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