Comparison between "Traditional Fund of Funds" and "Fund of Hedge Funds"

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(Prepared by Hong Kong Investment Funds Association)

For general descriptions of hedge funds and traditional unit trusts/mutual funds, please refer to Table 1.

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

	Traditional Fund of Funds or Unit Portfolio Management Funds ("UPMF")	Fund of Hedge Funds ("FoHFs")
Key characteristic	Primarily invests its assets in other funds.	Primarily invests its assets in other hedge funds.
Regulated by	SFC, according to the Code on Unit Trusts and Mutual Funds	Ditto
Minimum subscription	No minimum set by the Code, only set by individual fund houses - varies, usually around US$5,000.
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 (it is likely that it may take a few weeks before redemption money is paid out)
Performance fees Calculation/payment Disclosure	"High-on-high" and "annual payment" Need to disclose how fees are calculated and paid	Same principles. However, such requirement does not apply to the underlying funds of a FoHFs. In addition, the offering document must specify:   whether performance fees are levied at both the scheme and the underlying funds level;   how are fees calculated and paid by the underlying funds; and   the aggregate or an indicative range of all the fees of the FoHFs and each underlying fund.
Limitation on Charges	If the underlying funds are managed by the same management company or its connected persons, all initial charges on these funds must be waived. The management company of a UPMF may not obtain a rebate on any fees levied by an underlying fund or its management company.	Ditto
Maximum loss of an investor (for risk warning, see "disclosure")	Limited liability, i.e. limited to their investments in the scheme.	Ditto
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 Ditto. In addition, a quarterly narrative report Specific warnings: Risks are not typically encountered in traditional funds Some or all of the underlying funds are not regulated by the SFC 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
Investment restrictions Principle Diversification:   Minimum number of underlying funds   Invest in which types of funds   Invest in another fund of funds   Specify the diversification strategy	Must adhere to clearly laid-down investment restrictions, e.g.   Generally not more than 10% of total assets in derivatives   Maximum 10% for borrowing, for temporary purpose only Five, and not more than 30% in one underlying fund Primarily authorized funds or funds established in recognized jurisdictions. May invest in unauthorized funds established in non-recognized jurisdiction, but subject to 10% of the assets Not allowed Not prescribed by the Code	Follows largely a disclosure approach - primarily rely on self-imposed investment restrictions. Ditto     Up to 10% of the assets of the FoHFs can be invested in underlying funds managed by personnel with less than 2 years' experience in the relevant hedge fund investment strategy Can invest in both authorized and unauthorized funds. No cap set on unauthorized funds, but a warning statement must be provided in the offering document on the risk implications on investor protection. Also, it can only mention names of the unauthorized funds and clearly marked as unauthorized and not available to HK residents, but not other details. Ditto     Required to explain in the offering document.
Requirement of the fund manager of "a fund of funds"	Requirements prescribed, e.g. on financial resources, experience, internal controls, human and technical resources etc.	Basically would assess the same factors, but there are additional requirements for FoHF manager: its key personnel should each have 5 years' general experience in hedge fund strategies, incl. at least 2 years' experience as a FOHF manager; should have suitable internal controls and risk management systems; have a diligence process for selecting underlying funds and on-going monitoring of their activities; and take reasonable care in selecting distribution agents, provide necessary information and training to the agents.
Requirement of the fund manager of the underlying funds	Same as above	Each of the key personnel of the management company of an underlying fund has at least 2 years' experience in the relevant hedge fund investment strategy. Up to 10% of the assets of the FoHFs can invest in underlying funds managed by personnel with less experience.
Independent trustee to safekeep assets of the underlying funds	Yes	Yes

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