GERMANY - Financial regulator BaFIN has emphasised the need for security in new guidelines on how pension funds and insurance companies should invest in hedge funds.
BaFIN recommends that safety should be ‘highest priority’. “Investors are particularly in need of protection as hedge funds can be complex, not transparent and risky and besides, capital protection rights are often substantially reduced,” BaFIN warns.
“Insurance contractors must thoroughly analyse the acquisition of such products, whether and which are suitable for their portfolio and must document appropriately the investment process.”
“Higher demands must be made, while assessing safety, especially in view of the complexity of such an investment and excluding risks as far as possible.”
One of the essential requirements to handle hedge funds is that only insurance companies or institutions, which can prove to be able to face the risks, as suggested by circular R 29/2002, should deal with hedge funds.
The economic and legal risks of investments in hedge funds must be comprehensively analysed “before purchase and again and again during investment phase”.
BaFIN also requires that, independently of the investment, the loss of the investor is limited to the value of the commitment and there should be no liability to pay any additional amount.
This condition must be guaranteed in the contract settling the special estate of the ‘kapitalanlagegesellschaft’, investment company, or with a contractual supplementary agreement.
Insurance companies with no personnel qualified to handle hedge fund risk management are excluded from such investments.
BaFIN has set six general rules regarding information and disclosure to provide in case of direct and indirect hedge fund investments, including information on organization, management, investment policy, risk management and depotbank.