As some alternatives are not as sensitive to the economy as others, they can provide relatively attractive yield opportunities while capturing relatively less market risk² in the current environment.

For example, while many investors seek more income in global high-yield bonds, alternative investment market australia, such bonds have a higher correlation to equity markets and represent a higher risk, when compared with government bonds, alternative investment market australia. Sectors such as transport, direct lending, and global infrastructure can offer relatively attractive yields, alternative investment market australia, as illustrated in the chart below.

Alternative sources of income

Source: Alerian, Bank of America, alternative investment market australia, Bloomberg Finance L.P., Clarkson, Drewry Maritime Consultants, FactSet, Federal Reserve, FTSE, MSCI, NCREIF, Standard & Poor’s, J.P. Morgan Asset Management. Global transport: Levered yields for transport assets are calculated as the difference between charter rates (rental income), alternative investment market australia, operating expenses, debt amortisation and interest expenses, as a percentage of equity value. Asset classes are based on NCREIF ODCE (Private real estate), FTSE NAREIT Global/USA REITs (Global REITs), MSCI Global Infrastructure Asset Index (Infrastructure assets), MSCI Global Property Fund Index –North America (U.S. Real Estate), MSCI Global Property Fund Index –Asia-Pacific (APAC real estate), Global Bloomberg Barclays U.S Convertibles Composite (Convertibles), Bloomberg Barclays Global High Yield Index (Global HY bonds), J.P. Morgan Government Bond Index Alternative investment market australia Global (GBI-EM) (Local currency EMD), alternative investment market australia, J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), MSCI Emerging Markets (EM equity), MSCI Europe (European equity), MSCI USA (U.S. equity), ASX (Australian equity). Transport yield is as ofInfrastructure and real estate Past performance is not a reliable indicator of current and future results. Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed, alternative investment market australia. Positive yield does not imply positive return. Data as of

Kim Ivey, the head of the Australian chapter of the Alternative Investment Management Association (AIMA) is upbeat. "One of the important features of Australia's hedge fund industry is that there are many local managers who have not yet been discovered by investors in the rest of the world. For many of the investors, Australia is just too far away. The country cannot be reached in one hour's plane ride from London, New York or Geneva. A part of the opportunity is that Australian managers still have capacity."

This is a point which has not been lost on other observers of the Australian scene. Notes Ephraim Grunhard, a portfolio manager for PSS/CSS (the Canberra-based pension funds of Australia's federal public servants): "Offshore managers are increasingly beginning to look at Australian hedge funds. More and more money has been chasing hedge fund capacity. The time allowed for the hedge fund selection decision has been reduced. Some strategies are showing signs that they have had the life arbitraged out of them."

Adds Colin Taylor, Director-Sales & Marketing of Prime Services with UBS in Sydney, " saw an increasing number of North American investors travelling to this region, with many willing to make an investment with local managers. However, because of the sizes of the allocations that these foreign investors were looking to make, they often had to work with several managers to satisfy their requirement.

"Several Australian managers tapped into this flow of capital. Many established managers who had been offering locally domiciled products to Australian investors looked at the possibility of running 'mirror' products that are domiciled offshore".

Prime brokers

One of the challenges for Australian managers is that there have effectively been barriers to entry to prime brokers in what is still only a small market place. Most observers agree that the total assets under Management of the Australian hedge fund community is about the same as Australian investors' holdings of hedge funds &#; at just A$20 billion (US$15 billion) or so.

UBS is generally reckoned to alternative investment market australia for around 60% of the unleveraged hedge fund assets that are managed from Australia, alternative investment market australia, and about 70% of the local managers, alternative investment market australia. Its main competitors as prime brokers are Goldman Sachs and Morgan Stanley.

Colin Taylor argues that UBS' dominant position comes from a number of factors. Unlike its rivals, UBS had a presence on the ground in Australia and was well placed to use Australia's regulatory and tax requirements as a competitive advantage. UBS had a stronger local investment banking franchise than the other prime brokers, alternative investment market australia. It was able to provide a wide range of services to local managers alternative investment market australia a single platform, regardless of where the managers had domiciled their funds.

Even a brief discussion with a local fund-of-hedge funds manager about Australian-based investors' demand for hedge funds reveals a number of idiosyncrasies. For instance, David McKenzie, the Director of Institutional Investor Services with Russell Investment Group in Sydney, emphasises that demand for hedge funds tends to be concentrated in a limited number of pension funds and tends to focus on two kinds of products &#; funds of funds and long/short equities. (See Separate Q&A Section)

Nevertheless, the market for hedge funds does not end with institutional investors in Australia, alternative investment market australia. Notes AIMA's Ivey: "One of the key trends has been retail investors' growing interest in hedge funds. The local regulatory regime means that fund promoters can reach retail investors provided that they have a locally domiciled product. Some of the master funds and other platform operators have looked for suitable single strategy products &#; and especially long/short equity funds."

"This has had implications for marketing of hedge funds. Local single-strategy managers have had the greatest opportunities with promoters of local retail products and with overseas-based investors, alternative investment market australia. Conversely, it seems to us that those local pension funds who are actually using hedge funds have tended to seek large, offshore-domiciled, alternative investment market australia, funds of funds."

Several observers suggest that retail investors' approach to hedge fund investing has been different to that of the pension funds and other institutions. One commentator, for instance, is Peter Coates, a Senior Investment Manager at HFA Asset Management, one of the leading local fund of funds managers. (See Separate Q&A Section) He suggests that retail investors were quicker, at least initially, than pension funds and other institutions to embrace the concept of absolute return investing.

Notes Dragana Timotevic, a Principal at Mercer Investment Consulting: "On balance, it is probably fair to say that retail investors led the way in terms of actually using hedge funds. Overall, though, the institutional investors have had more choice in terms of the variety of products that are available to them."

A plethora of alternative investment choices

One of the key aspects of the Australian hedge fund arena that sets it apart from those of other countries is that there is very widespread acceptance of the merits of non-traditional asset classes. The challenge is that non-traditional opportunities in Australia include direct and listed property, private equity, infrastructure funds, tax-advantaged forestry and agricultural investments, plus various other vehicles besides hedge funds and funds of hedge funds.

HFA's Coates and Russell's David McKenzie, representing leading fund-of-fund and multi-manager groups that are respectively focused mainly on retail and institutional investors, contend that the plethora of non-traditional, non-hedge fund vehicles that are available in Australia presents a challenge. Some pension funds and some consultants do not consider hedge funds separately from other non-traditional asset classes. Essentially, hedge fund promoters face meaningful competition for the investment dollar from a variety of quarters.

However, this view is not universal. PSS/CSS' Ephraim Grunhard, for instance, does not think that the usage of hedge funds is constrained by the availability of REITs, infrastructure funds and other proven non-traditional vehicles. Mercer's Timotevic suggests that investors recognise that many non-traditional vehicles provide superior income or greater stability of returns, especially when combined with other asset classes. "However, the other non-traditional vehicles usually offer different risk/return propositions to hedge funds crypto compare bitcoin price and this is widely understood," she says.

Long-only still delivers

Perhaps the greatest obstacle to the further development of hedge funds in Australia comes from the local stockmarket. In the world's largest hedge fund markets &#; the USA, Europe and Japan &#; interest in hedge funds was boosted by the poor performance of local stockmarkets. Investors could see a compelling alternative investment market australia to diversify away from local equities.

In Australia, on the other hand, the local stockmarket has consistently performed well. Australia largely missed out on the boom in technology, media and telecommunications shares in the late s, but it also largely escaped the subsequent bust. Its world class natural resource companies have been seen as key beneficiaries of stock investor software rise in the price of energy and other raw materials. In part because many of the key industries are oligopolies, the earnings of listed companies have risen steadily at a time that domestic demand has been robust.

Equally importantly, local equities have been a core asset class for both retail and institutional investors. Retail investors have been attracted to the local stockmarket by the favourable tax treatment of dividends and by initial public offerings, some of which have resulted from the privatisation of state-owned enterprises.

Perhaps because defined contribution schemes are more common in Australia than in some other countries, the pension plans have seen local equities as an attractive offset to their long-term liabilities.

In the event that the Australian equities market disappoints local investors in a big way in the coming year or so, it is quite possible that there will be a new, and significant, shift towards non-traditional assets. However, hedge funds will not be the only beneficiaries.

Australia's hedge fund market at a glance
 

• Total AUM of Australian-based hedge alternative investment market australia managers: cA$20 billion (US$15 billion).
• Investors' holdings of hedge funds: c$A20 billion (US$billion) or around 3% of retirement assets.
• Estimated number of pension funds that use hedge funds: 32% (according to Russell survey).
• Australian investors' favourite strategies: funds of funds and long/short equity.
• Locally domiciled retail products: significant and arguably led acceptance of absolute return investing in Australia.
• Dominant prime broker: UBS, with apparently % market share.
• Apparent constraints on development of Australian hedge fund industry: strong performance of local stockmarket; widespread availability of non-traditional vehicles other than hedge funds

What are the key features of HFA's approach to fund of hedge fund management alternative investment market australia you would emphasise?

All of our fund of fund products focus, to varying degrees, on absolute returns, capital preservation and the diversification of traditional portfolios. Our flagship product &#; HFA Diversified &#; has a history of delivering consistent positive returns with low instance and depth of loss, together with excellent diversification away from equities, bonds, credit, commodities and property.

The HFA International Shares Fund makes allocations to around 15 equity stock pickers based skatt pa bitcoin norge the world in their geographic market of expertise. This vehicle is an international equity alternative with the ability to produce non-market-directional returns, limit any loss caused by a market downturn and to diversify away from both the global stockmarket and from individual equity managers.

The HFA Australian Shares Fund has a similar mandate and objective to HFA International Shares Fund, but invests in domestic managers and strategies. This fund provides an alternative to the traditional allocation to Australian equities and typically has a net market exposure of around 15%.

How have Australian retail and institutional investors responded to the opportunities of investing in hedge funds?

We found that retail investors were initially much more accepting of the philosophy of absolute returns than were institutional investors. In essence, retail investors' objectives were closely aligned with our own &#; to make positive returns whenever possible, rather than to be beholden to a volatile index.

Trends of hedge fund usage by Australian pension funds and other institutions are changing. When the institutions first made allocations to hedge funds and absolute return funds, they typically began by using international/global funds of hedge funds. These funds of funds were usually domiciled outside Australia and generally managed in excess of US$10 billion. The institutions wanted a feeling of comfort and they found it in large funds.

Increasingly, the large funds are achieving returns that are becoming "commoditised". Accordingly, the Australian pension funds are more and more focusing on flexible and nimble boutique funds of hedge funds &#; which are usually managing less than US$5 billion &#; to meet their objectives.

Of course the pension funds were also keen to find alternatives to traditional long-only investment in Australian equities. Initially, they tended to use locally based single strategy managers who were offering quantitative equity market neutral products, alternative investment market australia. This was a quite different approach to that which we, and other fund of hedge fund managers, were following: we were making allocations to niche, opportunistic Alternative investment market australia managers.

Now it seems that some Australian pension funds have realised that picking single-strategy hedge fund managers is harder than picking traditional long-only managers, in part because the dispersion of returns from the various managers and strategies is that much greater. However, we have not yet seen a trend for Australian pension funds to make allocations to opportunistic boutique single managers, alternative investment market australia. Nor do they seem to have made allocations to local funds of hedge funds, who are increasingly filling their capacity offshore.

To what alternative investment market australia are hedge funds competing with other non-traditional investment opportunities in Australia?

Unfortunately, hedge funds are in competition with other non-traditional opportunities in this country, alternative investment market australia. It seems to us that some investment consultants, and particularly those that are focusing mainly on retail products, alternative investment market australia, have not progressed from the view that all "alternative investments" should be classified together. They include hedge funds, funds of hedge funds, infrastructure funds, forestry and agricultural investments, private equity, direct property and commodities in one, all-encompassing, investment category. This is in spite of the fact that each of these non-traditional asset classes have different risk-return qualities and do not respond in the same way to various trends in capital markets.

More progressive investors have recognised that these various non-traditional best way to invest money for retirement income classes have different qualities and characteristics and have taken a suitably disciplined approach to building their portfolios. In many cases, these investors have been attracted to the consistently defensive qualities of a well-managed fund of hedge funds

What are the key features of Russell Investment Group's approach to fund of hedge fund management that you would emphasise?

We would stress that the philosophical justification for fund of hedge fund investment is clear and strong. In the first instance, alternative investment market australia, hedge funds are a good place to find alpha. In the second, the fund of funds approach provides good diversification of risk &#; which is arguably more important with hedge funds than with conventional long only managers. We look for underlying managers that clearly have a competitive edge and a compelling story.

What do you see as the main additional risks that hedge funds carry relative to long-only managers?

Operational risk is something that we pay a lot of attention to. For instance, we consider the extent to which the alternative investment market australia fund manager is dependent on the insights of one or two senior individuals. We also consider the possible implications of a hedge fund manager going out of business. Suppose a pension fund with a conventional long-only segregated portfolio learns one day that an underlying manager has gone out of business. The pension fund will be able to exert control over the portfolio very quickly, because it has the primary relationship with the custodian. There may well be transition management issues to be dealt with, but the potential fall out is limited.

Then suppose that the pension fund has allocated money to a hedge fund manager that has ceased operations. The pension fund will almost certainly have invested through a fund rather than a segregated portfolio. There will of course be a custodian, but its primary relationship will be with the hedge fund manager not the pension fund: it will be harder for the pension fund to re-exert control. To the extent that the hedge fund manager has been using leverage, alternative investment market australia is conceivable that the possible losses will exceed the amount of alternative investment market australia invested by the pension fund in the hedge fund.

How would you describe the Australian hedge fund industry?

We see the Australian hedge fund industry as one that is growing, but neither rapidly nor evenly. In our annual survey of local pension (superannuation) funds, which was completed earlier this year, we found that about 32% of all pension funds are using hedge funds. However, hedgefunds are much more important to some parts of the pension community than others. They are, for instance, very widely used alternative investment market australia the industry funds (i.e. the not-for-profit pension funds associated with Australia's trade union movement and which account for roughly 10% of overall pension assets).

Conversely, hedge funds are not widely used by Australia's corporate pension funds. They are focusing on the new licensing requirements and the implications of the new choice-of-fund legislation, alternative investment market australia. They may not be averse to the idea of using hedge funds, but they have other issues to deal with in the short term.

Most estimates suggest that the Australian pension funds hold around A$20 billion in hedge funds &#; or roughly 3% of total assets under management. However, we have found that those pension funds that actually use hedge funds typically have allocations that are twice this size at around 6%.

The other feature of the Australian hedge fund industry that we would emphasise is that it is highly concentrated. Our survey found that local pension funds overwhelmingly focused on two types of products. One, as might be expected, is multi-strategy funds of hedge funds. The other is funds that are following long/short equity strategies.

Did the comparatively disappointing performance of hedge funds in have an impact on the Australian industry?

In Australia, the issue has not been the performance of hedge funds &#; and, in particular, the fairly pedestrian returns that were garnered during The real problem is that the local stockmarket has performed so well, both in absolute and relative terms. Thanks to the boom in commodity prices, a fairly robust local economy and good corporate profit results, long-only investors have made good money from Australian equities &#; which represent an important asset class for the local pension funds. Even in a reasonably sophisticated financial services industry, it can be hard to make the case for diversification into alternatives when the traditional asset class(es) are delivering good returns.

Conversely, the typical pattern in other countries is that demand for hedge funds has picked up when local stockmarkets have performed poorly. In the USA, for instance, interest in hedge funds grew substantially in the wake of the bursting of the technology, media and telecommunications bubble in early One of the reasons why Japan is an important market for hedge funds is that the local stockmarket has performed in a disappointing fashion for much of the 6 years or so since the major indices peaked.

To what extent are hedge funds competing with other non-traditional investment opportunities in Australia?

Even if a pension fund is philosophically committed alternative investment market australia allocating 6% &#; or even more &#; of its assets to non-traditional asset alternative investment market australia, it will almost certainly have to make a corresponding reduction to its existing portfolios of local equities, local fixed income, international equities and so on. The pension fund can consider real estate investment trusts (or listed property trusts, as they are generally known in Australia) which are well established. The country is also widely recognised as a leader in the development of infrastructure funds, alternative investment market australia. Private equity funds are available as, of course, are hedge funds. The bottom line is that the hedge fund managers of the world probably face more competition from providers of a wide variety of non-traditional vehicles in Australia than they would in other countries.

What does all this mean for Australian hedge fund managers who are keen to promote their services?

There are undoubtedly opportunities for the Australian-based hedge fund managers. However, their marketing needs to be targeted carefully. Within Australia, the most prospective clients are the industry funds and some other pension funds. They should also be able to do good business with foreign-based funds of hedge funds.

Wellington Management

Tracing our history toWellington Management is one of the world’s largest independent investment management firms. With over US$ trillion in client assets under management as of 31 Decemberwe serve as a trusted investment adviser to more than 2, institutional clients and mutual fund sponsors in over 60 countries. Our comprehensive investment capabilities are built on the strength of rigorous, proprietary research and span nearly all segments of the global capital markets, including equity, alternative investment market australia, fixed income, multi-asset, alternative investment market australia, and alternative strategies. As a private partnership whose sole business is investment management, our long-term views and interests are aligned with those of our clients. Our commitment to investment excellence is evidenced by our significant presence and long-term track records in nearly all sectors of the global securities markets.

Wellington Management’s alternatives capabilities benefit from what we think is the best of both worlds: the resources and reach of a US$ trillion global investment manager and the agility and entrepreneurial spirit of a US$ billion alternatives boutique. Our private ownership model, world-class infrastructure, and long-term mind-set help us attract and retain talented alternatives investment professionals. We combine their skill with robust risk-management tools to help deliver solutions to the complex challenges our clients face. To learn more about our alternative strategies, including hedged equity, fixed income, and multi-asset solutions. (Figures are as of 31 December )

Issued by BlackRock Investment Management (Australia) Limited ABN 13AFSL (BIMAL).

This material provides general alternative investment market australia only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.

This material is not intended for distribution to, alternative investment market australia, or use by, any person or entity in any jurisdiction or country where such distribution or use would b contrary to local law or regulation. BIMAL is a part of the global BlackRock Group which comprises of financial product issuers and investment managers around the world. BIMAL is the issuer of financial products and acts as an investment manager in Australia.

This material has not been prepared specifically for Australian investors. It may contain references to dollar amounts which are not Australian dollars and may contain financial information which is not prepared in accordance with Australian law or practices. The funds detailed in this material may not be registered for public distribution in Australia. The laws and regulations of any such fund’s country of domicile and registration may differ from those in Australia and therefore may not necessarily provide the same level of protection to investors as schemes registered in Australia and subject to Australian regulations and conditions.

BIMAL, its officers, employees and agents believe that the information in this material and the sources on which it is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by BIMAL, its officers, employees or agents, alternative investment market australia. Except where contrary to law, BIMAL excludes all liability for this information.

Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and alternative investment market australia may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies.

No part of this material may be reproduced or distributed in any manner without the prior written permission of BIMAL.

© BlackRock, Inc. Alternative investment market australia Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES and the stylised i logo are registered and unregistered trademarks of BlackRock, alternative investment market australia, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

MKTGHA/S

1 Legislative and regulatory framework

In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?

The primary source of legislation regulating alternative investment funds (AIFs) and investment managers in Australia is the Corporations Act Regulation is also provided by the relevant Australian regulator – the Australian Securities and Investments Commission (ASIC), which administers and alternative investment market australia the laws, best cryptocurrency to invest in 2022 august publishes its own regulatory guides and guidance for fund managers in Australia.

Do any special regimes or provisions apply to specific types of alternative investment funds?

AIFs are generally regulated in the same way as other forms of managed investment schemes (the Australian term for investment funds), although fundamental differences will arise depending on whether the fund is a registered fund (typically designed for retail investors) or a wholesale fund (not required to be registered and designed for sophisticated, professional and other investors classified as wholesale investors). While this is not a requirement for wholesale investors, some AIFs choose to be registered as this can make them more attractive to institutional investors, such as large Australian superannuation (pension) funds.

Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?

ASIC has many memoranda of understanding with other regulators in other jurisdictions to ensure that the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected, alternative investment market australia. In certain cases, legislation has extra-territorial reach and may affect foreign managers targeting Australian investors.

Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?

The regulators globally, particularly those who are members of the International Organization of Securities Commissions, cooperate with each other in enforcing the laws and regulations of the relevant jurisdictions.

Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?

ASIC is responsible for regulating all funds and issuing Australian financial services licences (AFSLs). Those that promote or offer funds in Australia are generally required to hold an AFSL or fall within a particular exemption. This applies regardless of whether the offerings are restricted to wholesale clients and whether the funds are AIFs. Any person that carries on or is deemed to carry on a financial services business in Australia will generally be required to hold an AFSL covering the provision of financial services, unless a particular exemption applies, alternative investment market australia. A ‘financial service' includes marketing a fund, arranging for a person to invest in a fund, issuing interests in a fund, providing advice in relation to investment in a fund, providing investment management services to a fund and more.

Other regulatory bodies relevant to the AIF ecosystem include the following:

• the Australian Prudential Regulation Authority, which primarily focuses on the prudential regulation of banks, insurance companies, superannuation funds and, most recently, non-bank lenders;
• the Australian Securities Exchange (ASX), which prescribes rules governing the listing of investment funds on the ASX, including listed real estate alternative investment market australia trusts and exchange traded funds, as well as rules governing the conduct of market operators and brokers;
• the Australian Transaction Reports and Analysis Centre, which administers Australia's anti-money laundering and counter-terrorism financing laws, including rules relating to the identification of investors in investment funds and counterparties to derivative transactions;
• the Foreign Investment Review Board, which screens applications for foreign investment into Australia, in particular with respect to investment in residential property, alternative investment market australia, large commercial real estate, agriculture, infrastructure and other investments that are above certain monetary thresholds or that raise national interest considerations. Additional screening requirements apply for investment by foreign government investors (including sovereign wealth funds) and investment funds and other entities in which any foreign government investor has a significant interest;
• the Takeovers Panel, which focuses on resolving takeover or corporate control-related disputes arising in relation to listed or other widely held entities;
• the Australian Taxation Office, which is the federal revenue collection agency and is also charged with regulating the self-managed superannuation fund sector; and
• the revenue agencies of the states and territories, which are responsible for stamp duties and land taxes on land, mining and infrastructure-related transactions.

To what extent do the regulators cooperate with alternative investment market australia counterparts in other jurisdictions?

ASIC has many alternative investment market australia of understanding with other regulators in other jurisdictions to ensure alternative investment market australia the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected.

2 Form and structure

What types of alternative investment funds are typically found in your jurisdiction?

Hedge funds and private equity funds are generally made available only to wholesale investors, since they have specialised fee structures and are often illiquid (with either a soft lock or a more permanent lock on withdrawals). There has been a growing trend in making absolute return funds also alternative investment market australia to retail clients. Real estate funds are historically popular in Australia. Listed and other retail real estate funds are a long-established investment product in Australia. There are also the same types of alternative investment funds (AIFs) available to wholesale investors in Australia as there are in any other sophisticated jurisdictions, such as credit funds, distressed investment funds and other types of atypical investment products.

How are these alternative investment funds typically structured?

Most investment funds set up in Australia, whether alternative or standard, are structured as ‘unit trusts'. Australian investors are used to investing in unit trusts, and the tax consequences and flow-through tax treatment of unit trusts are alternative investment market australia understood and catered for in Australian law and practice. Where a foreign fund is made available to a wholesale investor in Australia, the fund will invariably retain the structure under which its non&#;Australian investors may participate. These would include corporate entities, limited partnerships or a combination of both.

What are the advantages and disadvantages of these different types of structures?

The advantages of establishing a fund in Australia as a unit trust are:

• the recognisability of the product in the Australian market;
• the flow-through tax treatment for investors – in particular:
• • flow-through of capital gains tax discount benefits on capital gains for resident individuals and superannuation funds; and
  • flow-through of concessional tax rates on dividends, interest, royalties and non-Australian source income and gains for non-resident investors; and
  • potential access to concessional tax rates for foreign entities in treaty countries, sovereign entities and certain foreign pension funds.

However, alternative investment market australia, flow-through tax treatment is generally not available in the case of public unit trusts that conduct, control or have the ability to control a trading business.

What are the most widely used alternative investment funds structures used in your jurisdiction?

The bitcoin investering 6 days commonly used fund structure is the unit trust, although other structures such as limited partnerships are sometimes used for private equity or venture capital. Corporations are not commonly used as investment fund vehicles in Australia, as companies are generally subject to income tax and capital gains tax (currently at a tax rate of 30%). Dividend imputation is generally available to resident investors to entitle them to a tax credit for their share of income tax paid by a company on their dividend income from the company. However, for foreign investors, dividend imputation merely relieves the dividend from withholding tax. Listed investment companies (LICs) are an exception: if an investment company qualifies as a LIC, it can allow a form of flow-through tax benefit to shareholders for capital gains. The absence of a general form of corporate with flow-through alternative investment market australia treatment has been identified as a deficiency in the Australian investment framework. Revised draft legislation has been developed to provide the asset management industry with the ability to adopt a corporate collective investment vehicle structure with flow-through tax treatment, subject to operating within the parameters of the legislation. At the shake your money maker of writing, the revised draft legislation has not been put into law.

Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?

The unit trust structure is preferred for most AIF structures, although limited partnerships are often used for venture capital or private equity strategies. Listed investment vehicles (such as LICs and listed trusts) have become somewhat more popular over the last few years although the tax position of listed investment alternative investment market australia needs to be carefully managed.

Are alternative investment funds required to have a local administrator appointed?

The form, structure and regulatory requirements for an AIF will depend on whether it is registered (as a managed investment scheme will generally not be available to retail investors if it is not registered). In the case of an unregistered fund, there are no specific requirements for a local administrator or other service provider. In the case of a registered fund, there is no requirement for a local administrator; although it is common for the trustee (referred to as a responsible entity) of the fund to appoint a local administrator to handle matters such as application and withdrawal processing, accounting, some aspects of tax management, maintenance of registers and other services typically provided by an administrator.

Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?

In order to hold custody of the assets of an Australian investment fund, the custodian must hold an Australian financial services licence and must meet the regulatory capital (net asset backing) requirements imposed by the Australian Securities and Investments Commission.

Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?

It is not common for an alternative investment fund established and domiciled do authors make a lot of money Australia to redomicile in Australia. This is because, if the fund is a registered fund, it will need to have a constitution which meets Australian legal and regulatory requirements. In the case of an unregistered fund, alternative investment market australia, there may alternative investment market australia bitcoin investor scam uber to redomicile in Australia although this is less common.

3 Authorisation

Must alternative investment funds be authorised or licensed in your jurisdiction?

An unregistered fund (namely one which is available only to wholesale clients) need not be authorised or licensed itself in Australia. A fund that is offered to retail client investors must be registered alternative investment market australia the Australian Securities and Investments Commission (ASIC). A venture capital or private equity fund structured as a limited partnership must be registered with Innovation Australia. The entity managing, marketing or distributing a fund, however, must be licensed (ie, hold an Australian financial services licence (AFSL)) or have the benefit of a particular exemption.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

An alternative investment fund (AIF) that is registered or required to be registered (it must be registered if it is to be offered to retail clients) must have a constitution and an approved trustee (known as a responsible entity and which has an AFSL with a responsible entity authorisation). Any entity managing, marketing or distributing the fund must be licensed (ie, hold an AFSL) or have the benefit of a particular exemption.

What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?

The constitution must be lodged and registered with ASIC and meet the requirements of the Corporations Act and ASIC requirements for contents of a fund constitution. Once an acceptable constitution is lodged with ASIC, registration must be effected within 14 days; although the process leading up to preparing a complying constitution can, of course, take some time.

4 Management and advisory relationships

How are alternative investment fund managers and advisers typically structured in your jurisdiction?

The structure of an alternative investment fund (AIF) in Australia will usually include an entity that will act as the trustee (or responsible entity, in the case of a registered fund), which in turn will appoint a fund manager (whether a third-party manager or an adviser or affiliate of the trustee) to manage the fund and the assets of the fund. If the trustee of an AIF is an affiliate of the fund manager, the trustee is often formed specifically for the purpose of acting as trustee of that fund. Other appointed service providers can include administrators and custodians.

What are the advantages and disadvantages of these different types of structures?

The primary advantage is that investors understand these structures and the roles of the parties, including the clear separation of functions. A possible disadvantage is the marginal extra cost of an additional party.

Must alternative investment fund managers be authorised or licensed in your jurisdiction?

AIF managers must be authorised or licensed to market and distribute the fund or manage the assets of the fund, or must have the benefit of a particular exemption. The fund manager will typically hold an Australian financial services licences (AFSL) (or a ‘foreign AFSL'), or be appointed as an authorised representative of an AFSL holder (which may be the trustee of the fund).

Traditionally, AFSL exemptions were available, on application, alternative investment market australia, to regulated entities alternative investment market australia a few recognised foreign jurisdictions which the Australian Securities and Investments Commission (ASIC) regards as having equivalent regulation and supervision as in Australia. For example, an investment adviser regulated by the Securities and Exchange Commission in the United States or by the Financial Conduct Authority in the United Kingdom would typically be entitled to such an exemption (upon application). That exemption process, however, was replaced from 1 April by a foreign Australian financial services licence regime, which requires these foreign entities to apply for a ‘foreign AFSL'.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

Obtaining an AFSL involves a merits-based application to ASIC. The application must include evidence of compliance and governance arrangements supporting compliance alternative investment market australia financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.

Australian financial services licensing of foreign financial services providers: Following a consultation process, ASIC has proposed the adoption of a ‘foreign AFSL' regime for offshore asset managers that are interested in advisory or asset management relationships with wholesale clients in Australia. The foreign AFSL regime mirrors the existing AFSL regime, subject to the relaxation of a number of regulations where the foreign financial services provider is otherwise regulated under a sufficiently equivalent foreign regulatory regime. The foreign AFSL regime was introduced on 1 April and is intended to replace the passport regime alternative investment market australia relied on by foreign financial services providers from a number of jurisdictions with regulatory regimes that are viewed as sufficiently equivalent to the Australian regime. Under prior law, foreign financial services providers that are regulated by their equivalent securities regulator in the United States, alternative investment market australia, the United Kingdom, Hong Kong, Singapore or Germany may (upon application) access relief from the need to hold an AFSL to provide financial services to wholesale clients in Australia.

What is the process for obtaining authorisation and how long does this usually take?

The process is to complete an online application and lodge the documents and proofs requested. Three months to six months is the typical timeframe. The application must include evidence of compliance and governance arrangements supporting compliance with financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.

What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?

The main restrictions and requirements applicable to AIF managers and advisers in Australia are the licensing requirements. Other financial services laws may apply, including privacy legislation, anti-corruption/bribery law and anti-money laundering and counter-terrorism measures.

Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?

If an AIF is not registered, there is no limit on the restrictions that can be included in the fund constitution regarding the issue, redemption or transfer of interests in the fund, subject to adequate disclosure. The same generally applies if an AIF is registered, except that there are requirements regarding the timing and apportionment of redemption payments if the fund is illiquid and in relation to the suspension of redemptions in the case of a liquid fund.

Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.

ASIC applies fit and proper checks prior to licensing AIF managers. A change in control of a licensed entity will also trigger an ASIC review.

Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.

As the holder of an AFSL, an AIF manager is generally entitled to provide investment management services to wholesale clients, including under a segregated mandate agreement with an institutional investor client. There are no specific requirements relating to the ability of an investment manager to delegate to third-party managers and advisers, alternative investment market australia, provided that those parties are appropriately licensed and authorised.

Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?

An investment manager which is appropriately licensed and authorised under an AFSL can provide investment management services to clients other than AIFs, subject to appropriate governance and competency.

5 Marketing

Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?

The marketing of AIFs is regulated by the Corporations Act The regulatory requirements apply regardless of whether the fund is marketed to wholesale clients or retail clients. The entity marketing a fund must be licensed (ie, hold an Australian financial services licence (AFSL) or have the benefit of a particular exemption.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

In order to engage in marketing activities in Australia, the promoter must hold an AFSL (or a ‘foreign AFSL'). A licence can be limited – for example, by allowing the entity to engage in dealing and advice activities (typically, marketing would cover either or both of these) to wholesale investors only. Although an AFSL may include authorisations that allow the holder to market funds to retail clients, the particular funds must first be registered in order to be offered to retail clients.

What is the process for obtaining authorisation and how long does this usually take?

The procedures for obtaining an AFSL differ according to whether the entity is an Australian incorporated and domiciled entity or whether it is a foreign investment adviser regulated by an approved foreign jurisdiction such as the US Securities and Exchange Commission or the Financial Conduct Authority.

To whom can alternative investment funds be marketed?

Alternative investment funds (AIFs) can be marketed to both wholesale clients and retail clients. If marketed to retail clients, the fund must be registered, and will be regulated, alternative investment market australia, as a registered scheme and require a product disclosure statement. Depending on the type of AIF, alternative investment market australia, the Australian Securities and Investments Commission (ASIC) has new powers under which it may deem the marketing of an investment in such a fund to retail clients as inappropriate and exercise its intervention powers.

What are the content criteria that marketing materials for alternative investment funds must satisfy?

The marketing rules are set out in the Corporations Act and ASIC policy. For example, in the case of an offer to retail clients, the marketing cannot be undertaken unless and until a disclosure document (called a ‘product disclosure statement') is available and the marketing materials refer to that document and the importance of investors obtaining a copy of and reading that document.

What other requirements or restrictions apply to marketing materials for alternative alternative investment market australia funds?

In the case of marketing generally – whether to wholesale clients or retail clients – ‘misleading and deceptive conduct' rules apply. These rules apply for all kinds of funds, alternative investment market australia, whether alternative or not; but in the case of AIFs, they will be more closely scrutinised (especially if offered to retail clients), to ensure that investors are not given information that is misleading or deceptive (whether by inclusion or omission).

Offers to wholesale clients do not require a product disclosure statement, but will usually be made in the same way as they are made in many other jurisdictions – namely, using an information memorandum (or private placement memorandum), which is a private offering document and does not have prescribed content.

Wholesale clients comprise certain institutional, sophisticated and professional investors that meet relevant criteria prescribed by the Corporations Act For example, a person who provides an accountant certificate certifying net worth of at least A$ million (or annual gross income of at least A$, for the last two years) may qualify as a wholesale client. It is anticipated that ASIC will in due course tighten up aspects of the wholesale client definition.

Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?

Fund managers from outside Australia cannot actively market their fund in Australia unless they hold an AFSL or operate under an exemption. A new regime will be in place from 1 April for foreign fund managers to apply for a foreign AFSL as noted in question

Is the appointment of local marketing entities required in your jurisdiction?

Local marketing entities that hold an AFSL will be the only entities permitted to promote and distribute the fund and engage with clients and investors unless the foreign fund manager or fund promotor holds an AFSL or a foreign AFSL, or alternative investment market australia from other exemption.

Is it possible to market alternative investment funds to retail rs07 money making guide f2p in your jurisdiction? If so, are there specific requirements?

Foreign AIFs can typically be offered to wholesale clients in Australia without much restriction (subject to the licensing rules and the regulation of marketing activities and market conduct rules). Alternative investment market australia practice, foreign AIFs are rarely offered directly to retail clients in Australia, as there are many layers of regulation which apply to retail offerings, including stricter Australian licensing requirements and the need for the fund to be registered with ASIC.

ASIC has recently been provided with additional product intervention powers, which are aimed at regulating some product architecture. Additional design and distribution regulations will take effect in early and will require financial product issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products to retail customers. This will enable ASIC to prevent the offering of certain types of funds to retail investors where those funds are not suitable for retail investors (which could arise in the case of a complex investment fund that has limited withdrawal rights). The issuer and distributor will be required to identify the target market alternative investment market australia making a target market determination for that product, and ensure that the product is distributed only to that market segment.

6 Investment process

Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?

No specified investment or borrowing restrictions apply to the portfolios of alternative investment funds (AIFs), subject to limited exceptions. If the fund is offered to retail clients with short-term withdrawal rights, then as a matter of structure, the fund must invest in assets which alternative investment market australia enable that liquidity obligation to be met. Specific provisions in the Corporations Alternative investment market australia deal with the difference between liquid and illiquid funds and the types of liquid investments which would be required to satisfy withdrawal requests.

Are there any specific legal alternative investment market australia regulatory requirements regarding investments in particular assets?

Venture capital or private equity vehicles formed as venture capital limited partnerships or early stage venture capital limited partnerships must invest only in certain eligible venture capital investments (which excludes certain sectors, such as companies involved in the provision of finance, real estate or infrastructure; although it can include certain start-up fintech businesses).

7 Reporting, governance and risk management

What key disclosure requirements apply to alternative investment funds in your jurisdiction?

As alternative investment funds (AIFs) are usually offered only to wholesale (non -etail) clients, the key disclosure document is the information memorandum, however named, which must not alternative investment market australia information that is misleading or deceptive (whether by inclusion or omission).

What key reporting requirements apply to alternative investment funds in your jurisdiction?

Reporting, governance and risk management requirements differ according to whether the fund is registered or unregistered. For unregistered funds, this will depend largely on what is promised in the information memorandum.

What key governance requirements apply to alternative investment funds in your jurisdiction?

If the fund is offered to retail clients and is therefore registered, the trustee (responsible entity) must be appropriately authorised and a compliance committee must be established for the fund (unless more than half of the directors of the responsible entity are independent directors).

What key risk management requirements apply to alternative investment funds alternative investment market australia your jurisdiction?

If the fund is unregistered (as is typically the case with AIFs that are offered to wholesale clients only), it will not be subject to any legislative reporting, governance or risk management requirements; but the licence-holding trustee or manager will be subject to legislative risk management requirements, including in are royalties always passive income to conflicts of interest and risk management processes.

Funds that are offered to retail investors and use an absolute return, hedge, infrastructure, mortgage or direct real estate investment strategy must report to investors annually based on a set of disclosure principles and benchmarks.

8 Tax

How are alternative investment funds treated for tax purposes in your jurisdiction?

Unit trusts investing in portfolio interests in financial assets, or ‘passively' investing in real estate to derive rent, will generally have flow-through tax treatment, alternative investment market australia, and income and capital gains will be taxable in the hands of unitholders (if Australian tax residents) or on a withholding basis (from distributions to non-Australian tax resident unitholders).

A public unit trust that carries on a ‘trading business' for a relevant tax year is generally denied flow-through tax treatment and is treated as if it were a company for most tax purposes, including being subject to the applicable corporate tax rate. The cases in which a unit trust will be considered to carry on a ‘trading business' include:

• conducting real estate development or similar activities; or
• controlling, or having the ability to control, a trading business.

Taking into account these tax considerations, the Australian market developed what is known as a ‘stapled trust' structure, which generally involves investors being offered units in a trust (that restricts its activities to those necessary to retain flow-through tax treatment) stapled to units in another trust, or to shares in a company, that in either case carries on or controls a trading business (often using land or infrastructure leased to it by the trust). This structure became very common for investment in infrastructure such as toll roads, seaports and energy utilities. Although there has been long-standing use of these types of stapled structures, alternative investment market australia, the Australian government recently enacted measures to limit the benefits of stapled structures –albeit with a transitional period of continuing favourable treatment for certain eligible arrangements. A 30% withholding tax rate on distributions of certain kinds of ‘non-concessional' income has alternative investment market australia introduced, and may, for example, alternative investment market australia, apply to investments in agricultural land or residential housing (other than affordable housing). At the same time, steps were taken to codify, and to an extent pare back, access to concessional tax treatment through flow-through trusts for foreign pension funds and sovereign entities.

There are special rules for eligible domestic investment trusts that are widely held, known as managed investment trusts (MITs). Unit trusts that are eligible to meet the criteria for MIT status may attract a concessional tax profile for non-resident investors, including (potentially):

• flow-through of tax treaty rates on dividends, interest and royalties;
• a concessional withholding tax rate (15%) on distributions of other Australian source income, such as rental income by real estate-based MITs; and
• tax-free treatment of non-Australian source income and capital gains.

Additionally, MITs can elect for capital account treatment of gains on the realisation of eligible investments (subject to various exceptions, including land held as trading stock, debt interests and certain financial arrangements), which may be advantageous to both Australian and foreign resident investors, alternative investment market australia. For example, non-resident investors are subject to withholding tax under the capital account election only in relation to gains from the disposal of an interest held (directly, or in some cases, alternative investment market australia, indirectly) by the MIT in real property situated in Australia (defined broadly). Alternative investment market australia resident individuals and superannuation funds, on the other hand, can access discounted capital gains tax treatment where the relevant investment was held by the MIT for at least 12 months.

Eligibility for MIT status requires the following, among other things:

• Certain investment management decisions are alternative investment market australia within Australia;
• The trust meets a widely held requirement (which may potentially also be satisfied if a substantial part of the unitholder base comprises certain types of widely held investors, such as pension funds); and
• The trust has an investment strategy that excludes the taking of controlling interests in portfolio entities that carry on a trading business.

Unit trusts may be operated in any manner as determined in the trust deed adopted by the trustee, which may, for example, provide for operation as either an evergreen or closed-end fund, alternative investment market australia. Alternative investment market australia taxation purposes, MITs may elect to be treated as ‘attribution MITs' which, among other things, permits the trusts to attribute income and gains of different character to different members in accordance with entitlements under the trust instrument. It also allows the trusts to correct errors or delays in finally ascertaining trust income by making adjustments in the year the need for correction is discovered, rather than having to reopen prior year distributions and tax filings.

While foreign investment funds will not generally be subject to Australian capital gains alternative investment market australia on portfolio investments in Australian businesses, capital gains tax can be incurred in the case of non-portfolio investments in companies, trusts or limited partnerships holding land or mining assets – for example, alternative investment market australia, an interest of 10% or more in an entity for which more than 50% of its asset value is attributable to ‘taxable Australian property' such as real estate or mining or petroleum interests.

Some controversy has arisen as to how these rules apply to investments by foreign limited partnerships which are eligible for flow-through treatment in the home jurisdictions of the investing partners (eg, the United States) and hence arguably entitled to flow-through tax treatment under Australian tax treaties with those jurisdictions. Litigation in the federal courts has not yet finally resolved the issue, but has apparently concluded that the limited partnership itself cannot claim the benefit of the treaty protections for transparent vehicles (Commissioner of Taxation v Resource Capital Fund IV LP [] FCAFC 51).

Limited partnerships are generally treated under Australian tax law as companies – that is, alternative investment market australia are taxed at the company tax rate and do not offer flow-through tax treatment. However, exceptions to this general rule apply to limited partnerships that are registered with the Australian government to engage in eligible venture capital investment activities. These types of limited partnerships can be used for certain venture capital and certain private equity investment strategies. Legislation provides for registration of venture capital limited partnerships (VCLPs), early stage venture capital limited partnerships (ESVCLPs) and Australian venture capital funds of funds (AFOFs). Each of these may be eligible for certain capital gains tax concessions on qualifying investment activities. For example, eligible foreign investors will generally not be subject to Australian tax on realised capital gains by VCLPs on eligible venture capital investments held for at least 12 months. The concessional treatment of eligible venture capital investments has been supplemented by a regime for ‘early stage innovation companies' (ESICs) that includes an upfront tax offset for up to 20% of the value invested (but capped at $,) and a capital gains tax exemption for ESIC shares held for at least 12 months, but less than 10 years, alternative investment market australia. Early stage investor tax concessions may also be available to start-up fintech businesses for investments made after 1 July

How are alternative investment fund managers and advisers alternative investment market australia for tax purposes in your jurisdiction?

Australian investment fund managers and advisers are generally treated in the same way as alternative investment market australia taxpayers. In general, income and other rewards for management or advisory services will be taxed as ordinary income; there is a capital gains tax treatment for carried interests in venture capital partnerships in certain cases.

Foreign investment fund managers and advisers are generally exempt from Australian taxation, provided that they do not have a permanent establishment in Australia; but in some cases they may be taxed on Australian-sourced fee income – for example, alternative investment market australia, if operating through a dependent agent in Australia. Distributions of carried interests from a MIT may in some cases be deemed to be Australian-sourced income.

Foreign investment funds using Australian-based managers, advisers or agents need to be careful not to establish a taxable Australian presence. Inthe tax laws were amended to introduce the investment manager regime (IMR), to enable an IMR-compliant foreign fund to retain its non-resident tax status for qualifying portfolio investments if its Australian presence is limited to using an eligible independent Alternative investment market australia fund manager, alternative investment market australia. The IMR also confirms that qualifying portfolio investments will not be subject to Australian income tax where they are held by eligible widely held foreign funds that do not have an Australian manager and do not otherwise have a permanent establishment or trading business in Australia.

How are alternative investment fund investors treated for tax alternative investment market australia in your jurisdiction?

There is generally flow-through of tax in funds which are structured as unit trusts so that investors typically share their tax burdens proportionate to their holdings in the funds (see question ).

What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?

Australia has enacted legislation to implement the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) in Australia. Managers have updated their onboarding processes to capture information needed to meet the compliance obligations attached to FATCA and CRS.

What preferred tax strategies are typically adopted in the alternative investment fund context?

The unit trust structure is the most commonly used because of its flow-through tax treatment and potential access to concessional tax treatment of distributions to foreign investors, alternative investment market australia. Some private equity and venture capital funds are structured as VCLPs, ESVCLPs and AFOFs. See question above for more information.

9 Trends and predictions

How would you describe the alternative investment fund landscape and prevailing trends in your

The landscape for alternative investment funds (AIFs) in Australia is promising, especially for the pension industry. The pool of investable capital from Australian superannuation funds (comprising both large public offer funds and self-managed superannuation funds) is among the largest in the world (largely due to the compulsory retirement savings regime introduced in the s), alternative investment market australia. Superannuation funds are constantly on the lookout for investment opportunities which may provide enhanced returns for their members. Many foreign investment managers and distributors and advisers are generally familiar with the Australian sophisticated and professional investor's style, alternative investment market australia, local investment fund structures and tax issues, and many are therefore comfortable with establishing satellite or feeder funds for Australian investors.

Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?

Corporate and limited partnership fund structures: In the – budget, alternative investment market australia, as part of the Ten-Year Enterprise Tax Plan, alternative investment market australia, alternative investment market australia government announced that it would introduce tax and regulatory frameworks for two new types of collective investment vehicles (CIVs): the corporate collective investment vehicle (CCIV) and the alternative investment market australia partnership CIV. On 19 Januarythe Treasury released comprehensive exposure drafts of both the regulatory and tax legislation for the CCIV regime. However, the relevant legislation is still to be enacted at the time of writing. The CCIV regime enables asset management firms to structure an investment fund as a corporation and is designed to be an internationally recognisable investment vehicle that can be marketed to foreign investors. Legislation facilitating more widespread use of a limited partnership structure is also proposed (currently, limited partnerships are used only in the private equity and venture capital sectors), and it is hoped will follow closely after finalisation of the CCIV legislation. The overarching aim of such legislation is to provide a choice of tax-transparent structures (unit trusts, corporations or limited partnerships), but with equivalent governance features. The introduction of these alternative structures reflects industry feedback that corporations and limited partnerships are more familiar legal structures in many markets outside Australia, including across Asia. The new structures aim to complement other recently enacted legislation (the Corporations Amendment (Asia Region Funds Passport) Act ) aimed at facilitating the cross-border marketing of similarly regulated fund products across jurisdictions that are signatories to the new Asia Region Funds Passport regime (initially Australia, South Korea, Thailand, New Zealand and Japan).

Tighter measures for the retail investor environment: As noted above, the new Australian Securities and Investments Commission intervention powers and product design and distribution obligations will change the landscape for AIFs offered to retail clients.

Advisers and other distributors of alternative investment funds will also need to have regard to the Financial Planners and Advisers Code of Ethics introduced by the Financial Adviser Standards and Ethics Authority. The code aims to ‘professionalise' the retail client advisory sector by introducing various ethics-based duties and standards.

Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?

Over the next 12 months, we expect that there will be continued government initiatives to enhance the establishment and prospering of technology based and venture capital funds (for structures, see question ), as in the past few years. This undertaking is being promoted and managed by the Department of Industry, Innovation and Science.

Real estate investment funds have for many years been a large and important part of the investment landscape in Australia, mainly for industrial and commercial property investments. New types of specialised property investment funds are being established to fill emerging needs and markets – for example, alternative investment market australia, student accommodation funds, disability housing, child care/education facilities, alternative investment market australia, defence force personnel housing and other areas of special need.

Other types of AIFs likely to grow in the near future are climate change and impact investing funds (there has already been rapid growth in ethical investment funds), high-yield corporate bonds and other investment types designed to provide a decent return in a low inflation, low interest rate environment.

Private equity funds in Australia largely adopt the best practice reporting and valuation guidelines formulated by their industry body, the Australian Investment Council (AIC) (formerly the Australian Private Alternative investment market australia and Venture Capital Association), alternative investment market australia. The AIC represents private equity, private credit funds, sovereign wealth and other institutional investors (including large superannuation entities), and are largely aligned with the private equity principles formulated by the Institutional Limited Partners Association. As the domestic private equity funds industry continues to attract significant investment from foreign investors, we also expect to see the continued alignment of domestic private equity funds terms with those in other developed private equity markets.

10 Tips and traps

What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?

The introduction of alternative collective investment structures, coupled with the Asia Region Funds Passport, should assist Australian asset managers to more effectively access foreign investor markets. Australian managers should continue to be supported by the reforms of several years ago (and since adopted in practice) under the investment manager regime (see question ), which removes some traditional tax uncertainty associated with foreign funds engaging with Australian managers.

In terms of foreign asset manager access to the Australian investor market, the new foreign Australian financial services licence regime will involve an upfront cost in the associated application process. This should, however, provide alternative investment market australia for managers in terms of a clear pathway for access to the Australian market and enhance Australian investor confidence associated with engaging with foreign managers.

The industry is expecting sustained foreign investor interest in Australian real estate, agriculture and infrastructure investment exposure. MIT structures are becoming understood by more and more well-known large foreign investors, and accepted as the gateway necessary to access a concessional withholding tax profile and deemed capital account election.

Acknowledgement: co-authored by Special Counsel Stephen Etkind

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

POPULAR ARTICLES ON: Finance and Banking from Australia

The Hedge Funds Rock & The Australian Alternative Investment Awards were held by live broadcast last night. A large, diverse viewing audience from over Australia and the Asia Pacific region logged on to view a free live performance broadcasted from a mobile studio in the Hyatt Regency hotel at Darling Harbour, Sydney.

Kim Ivey, HFR co-founder and Chairman of the Alternative Future Foundation: “Our thanks to all the sponsors, production crew, judges, event staff, partners, fund managers and viewers for being part of last night’s HFR and The Australian Alterative Investment Awards. In addition to seeing who the best alternative investment managers are in Australia, viewers were entertained by 2 live sets from Diesel and the great work of our guest MC, alternative investment market australia, Tom Williams. Viewers also had the opportunity to also hear directly from the charities that the Foundation supports and to donate directly to all of these causes. Our congratulations to all the winners and finalists in all the various award categories.”

Best Private Debt Fund
Merricks Capital Partners Fund (w)
Metrics Credit Partners – Secured Private Debt Fund I
Metrics Credit Partners – Diversified Australian Senior Loan Fund

Best Long/Short Equity Fund
Munro Global Growth Fund (w)
Bennelong Long Short Equity Fund
Alceon High Conviction Absolute Return Fund

Best Market Neutral Fund
Karara Market Neutral Plus Fund (w)
Bennelong Market Neutral Fund
Levitas Absolute Return VIX Fund

Best Multi-strategy Fund
Janus Henderson Alphagen Multi-Strategy Fund (w)
Legg Mason Tactical Allocation Fund
Cor Capital Fund

Best Global Macro/Futures Fund
QDRA Dynamic Macro Fund (w)
P/E Global FX Alpha Fund
JP Morgan Global Macro Opportunities Fund

Best FI & Credit Fund
PIMCO Australian Focus Fund (w)
Janus Henderson Global FI Total Return Fund
Realm Capital Series

Best Listed Alternative Investment Product (only 1 winner, alternative investment market australia, 1 finalist)
Monash Absolute Investment Company Limited (w)
Schroeder Real Return Fund

Best Emerging Manager
Revolution Asset Management (w)
Apollo Capital
Octopus Investment Australia

Best Investor Supporting Australian Managers Award
Alternative investment market australia Asset Management (w)

Best Offshore Manager Operating in Australia Award
J.P. Morgan Asset Management (w)
Invesco Australia
Franklin Templeton

Best Alternative Investment Manager Award
Winner &#; Metrics Credit Partners

Contribution to the Industry Award
Winner &#; Ms. Nikki Bentley

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The Alternative investment market australia is an ACNC registered charity with DGR status alternative investment market australia purpose is to help build positive alternative futures for disadvantaged Australians and their families. AFF is the organiser behind Hedge Funds Rock which began in as a fundraising and music enthused networking event for the alternative investment industry. The Australian Alternative Investment awards began in All profits are distributed to charity.

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1 Legislative and regulatory framework

In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?

The primary source of legislation regulating alternative investment funds (AIFs) and investment managers in Australia is the Corporations Act Regulation is also provided by the relevant Australian regulator – the Australian Securities and Investments Commission (ASIC), which administers and enforces the laws, and publishes its own regulatory guides and guidance for fund managers in Australia.

Do any special regimes or provisions apply to specific types of alternative investment funds?

AIFs are generally regulated in the same way as other forms of managed investment schemes (the Australian term for investment funds), although fundamental differences will arise depending on whether the fund is a registered fund (typically designed for retail investors) or a wholesale fund (not required to be registered and designed for sophisticated, professional and other investors classified as wholesale investors). While this is not a requirement for wholesale investors, some AIFs choose to be registered as this can make them more attractive to institutional investors, such as large Australian superannuation (pension) funds.

Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?

ASIC has many memoranda of understanding with other regulators in other jurisdictions to ensure that the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected. In certain cases, legislation has extra-territorial reach and may affect foreign managers targeting Australian investors.

Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?

The regulators globally, particularly those who are members of the International Organization of Securities Commissions, cooperate with each other in enforcing the laws and regulations of the relevant jurisdictions.

Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?

ASIC is responsible for regulating all funds and issuing Australian financial services licences (AFSLs). Those that promote or offer funds in Australia are generally required to hold an AFSL or fall within a particular exemption. This applies regardless of whether the offerings are restricted to wholesale clients and whether the funds are AIFs. Any person that carries on or is deemed to carry on a financial services business in Australia will generally be required to hold an AFSL covering the provision of financial services, unless a particular exemption applies. A ‘financial service' includes marketing a fund, arranging for a person to invest in a fund, issuing interests in a fund, providing advice in relation to investment in a fund, providing investment management services to a fund and more.

Other regulatory bodies relevant to the AIF ecosystem include the following:

• the Australian Prudential Regulation Authority, which primarily focuses on the prudential regulation of banks, insurance companies, superannuation funds and, most recently, non-bank lenders;
• the Australian Securities Exchange (ASX), which prescribes rules governing the listing of investment funds on the ASX, including listed real estate investment trusts and exchange traded funds, as well as rules governing the conduct of market operators and brokers;
• the Australian Transaction Reports and Analysis Centre, which administers Australia's anti-money laundering and counter-terrorism financing laws, including rules relating to the identification of investors in investment funds and counterparties to derivative transactions;
• the Foreign Investment Review Board, which screens applications for foreign investment into Australia, in particular with respect to investment in residential property, large commercial real estate, agriculture, infrastructure and other investments that are above certain monetary thresholds or that raise national interest considerations. Additional screening requirements apply for investment by foreign government investors (including sovereign wealth funds) and investment funds and other entities in which any foreign government investor has a significant interest;
• the Takeovers Panel, which focuses on resolving takeover or corporate control-related disputes arising in relation to listed or other widely held entities;
• the Australian Taxation Office, which is the federal revenue collection agency and is also charged with regulating the self-managed superannuation fund sector; and
• the revenue agencies of the states and territories, which are responsible for stamp duties and land taxes on land, mining and infrastructure-related transactions.

To what extent do the regulators cooperate with their counterparts in other jurisdictions?

ASIC has many memoranda of understanding with other regulators in other jurisdictions to ensure that the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected.

2 Form and structure

What types of alternative investment funds are typically found in your jurisdiction?

Hedge funds and private equity funds are generally made available only to wholesale investors, since they have specialised fee structures and are often illiquid (with either a soft lock or a more permanent lock on withdrawals). There has been a growing trend in making absolute return funds also available to retail clients. Real estate funds are historically popular in Australia. Listed and other retail real estate funds are a long-established investment product in Australia. There are also the same types of alternative investment funds (AIFs) available to wholesale investors in Australia as there are in any other sophisticated jurisdictions, such as credit funds, distressed investment funds and other types of atypical investment products.

How are these alternative investment funds typically structured?

Most investment funds set up in Australia, whether alternative or standard, are structured as ‘unit trusts'. Australian investors are used to investing in unit trusts, and the tax consequences and flow-through tax treatment of unit trusts are well understood and catered for in Australian law and practice. Where a foreign fund is made available to a wholesale investor in Australia, the fund will invariably retain the structure under which its non&#;Australian investors may participate. These would include corporate entities, limited partnerships or a combination of both.

What are the advantages and disadvantages of these different types of structures?

The advantages of establishing a fund in Australia as a unit trust are:

• the recognisability of the product in the Australian market;
• the flow-through tax treatment for investors – in particular:
• • flow-through of capital gains tax discount benefits on capital gains for resident individuals and superannuation funds; and
  • flow-through of concessional tax rates on dividends, interest, royalties and non-Australian source income and gains for non-resident investors; and
  • potential access to concessional tax rates for foreign entities in treaty countries, sovereign entities and certain foreign pension funds.

However, flow-through tax treatment is generally not available in the case of public unit trusts that conduct, control or have the ability to control a trading business.

What are the most widely used alternative investment funds structures used in your jurisdiction?

The most commonly used fund structure is the unit trust, although other structures such as limited partnerships are sometimes used for private equity or venture capital. Corporations are not commonly used as investment fund vehicles in Australia, as companies are generally subject to income tax and capital gains tax (currently at a tax rate of 30%). Dividend imputation is generally available to resident investors to entitle them to a tax credit for their share of income tax paid by a company on their dividend income from the company. However, for foreign investors, dividend imputation merely relieves the dividend from withholding tax. Listed investment companies (LICs) are an exception: if an investment company qualifies as a LIC, it can allow a form of flow-through tax benefit to shareholders for capital gains. The absence of a general form of corporate with flow-through tax treatment has been identified as a deficiency in the Australian investment framework. Revised draft legislation has been developed to provide the asset management industry with the ability to adopt a corporate collective investment vehicle structure with flow-through tax treatment, subject to operating within the parameters of the legislation. At the time of writing, the revised draft legislation has not been put into law.

Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?

The unit trust structure is preferred for most AIF structures, although limited partnerships are often used for venture capital or private equity strategies. Listed investment vehicles (such as LICs and listed trusts) have become somewhat more popular over the last few years although the tax position of listed investment companies needs to be carefully managed.

Are alternative investment funds required to have a local administrator appointed?

The form, structure and regulatory requirements for an AIF will depend on whether it is registered (as a managed investment scheme will generally not be available to retail investors if it is not registered). In the case of an unregistered fund, there are no specific requirements for a local administrator or other service provider. In the case of a registered fund, there is no requirement for a local administrator; although it is common for the trustee (referred to as a responsible entity) of the fund to appoint a local administrator to handle matters such as application and withdrawal processing, accounting, some aspects of tax management, maintenance of registers and other services typically provided by an administrator.

Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?

In order to hold custody of the assets of an Australian investment fund, the custodian must hold an Australian financial services licence and must meet the regulatory capital (net asset backing) requirements imposed by the Australian Securities and Investments Commission.

Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?

It is not common for an alternative investment fund established and domiciled outside Australia to redomicile in Australia. This is because, if the fund is a registered fund, it will need to have a constitution which meets Australian legal and regulatory requirements. In the case of an unregistered fund, there may be reasons to redomicile in Australia although this is less common.

3 Authorisation

Must alternative investment funds be authorised or licensed in your jurisdiction?

An unregistered fund (namely one which is available only to wholesale clients) need not be authorised or licensed itself in Australia. A fund that is offered to retail client investors must be registered with the Australian Securities and Investments Commission (ASIC). A venture capital or private equity fund structured as a limited partnership must be registered with Innovation Australia. The entity managing, marketing or distributing a fund, however, must be licensed (ie, hold an Australian financial services licence (AFSL)) or have the benefit of a particular exemption.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

An alternative investment fund (AIF) that is registered or required to be registered (it must be registered if it is to be offered to retail clients) must have a constitution and an approved trustee (known as a responsible entity and which has an AFSL with a responsible entity authorisation). Any entity managing, marketing or distributing the fund must be licensed (ie, hold an AFSL) or have the benefit of a particular exemption.

What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?

The constitution must be lodged and registered with ASIC and meet the requirements of the Corporations Act and ASIC requirements for contents of a fund constitution. Once an acceptable constitution is lodged with ASIC, registration must be effected within 14 days; although the process leading up to preparing a complying constitution can, of course, take some time.

4 Management and advisory relationships

How are alternative investment fund managers and advisers typically structured in your jurisdiction?

The structure of an alternative investment fund (AIF) in Australia will usually include an entity that will act as the trustee (or responsible entity, in the case of a registered fund), which in turn will appoint a fund manager (whether a third-party manager or an adviser or affiliate of the trustee) to manage the fund and the assets of the fund. If the trustee of an AIF is an affiliate of the fund manager, the trustee is often formed specifically for the purpose of acting as trustee of that fund. Other appointed service providers can include administrators and custodians.

What are the advantages and disadvantages of these different types of structures?

The primary advantage is that investors understand these structures and the roles of the parties, including the clear separation of functions. A possible disadvantage is the marginal extra cost of an additional party.

Must alternative investment fund managers be authorised or licensed in your jurisdiction?

AIF managers must be authorised or licensed to market and distribute the fund or manage the assets of the fund, or must have the benefit of a particular exemption. The fund manager will typically hold an Australian financial services licences (AFSL) (or a ‘foreign AFSL'), or be appointed as an authorised representative of an AFSL holder (which may be the trustee of the fund).

Traditionally, AFSL exemptions were available, on application, to regulated entities in a few recognised foreign jurisdictions which the Australian Securities and Investments Commission (ASIC) regards as having equivalent regulation and supervision as in Australia. For example, an investment adviser regulated by the Securities and Exchange Commission in the United States or by the Financial Conduct Authority in the United Kingdom would typically be entitled to such an exemption (upon application). That exemption process, however, was replaced from 1 April by a foreign Australian financial services licence regime, which requires these foreign entities to apply for a ‘foreign AFSL'.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

Obtaining an AFSL involves a merits-based application to ASIC. The application must include evidence of compliance and governance arrangements supporting compliance with financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.

Australian financial services licensing of foreign financial services providers: Following a consultation process, ASIC has proposed the adoption of a ‘foreign AFSL' regime for offshore asset managers that are interested in advisory or asset management relationships with wholesale clients in Australia. The foreign AFSL regime mirrors the existing AFSL regime, subject to the relaxation of a number of regulations where the foreign financial services provider is otherwise regulated under a sufficiently equivalent foreign regulatory regime. The foreign AFSL regime was introduced on 1 April and is intended to replace the passport regime currently relied on by foreign financial services providers from a number of jurisdictions with regulatory regimes that are viewed as sufficiently equivalent to the Australian regime. Under prior law, foreign financial services providers that are regulated by their equivalent securities regulator in the United States, the United Kingdom, Hong Kong, Singapore or Germany may (upon application) access relief from the need to hold an AFSL to provide financial services to wholesale clients in Australia.

What is the process for obtaining authorisation and how long does this usually take?

The process is to complete an online application and lodge the documents and proofs requested. Three months to six months is the typical timeframe. The application must include evidence of compliance and governance arrangements supporting compliance with financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.

What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?

The main restrictions and requirements applicable to AIF managers and advisers in Australia are the licensing requirements. Other financial services laws may apply, including privacy legislation, anti-corruption/bribery law and anti-money laundering and counter-terrorism measures.

Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?

If an AIF is not registered, there is no limit on the restrictions that can be included in the fund constitution regarding the issue, redemption or transfer of interests in the fund, subject to adequate disclosure. The same generally applies if an AIF is registered, except that there are requirements regarding the timing and apportionment of redemption payments if the fund is illiquid and in relation to the suspension of redemptions in the case of a liquid fund.

Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.

ASIC applies fit and proper checks prior to licensing AIF managers. A change in control of a licensed entity will also trigger an ASIC review.

Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.

As the holder of an AFSL, an AIF manager is generally entitled to provide investment management services to wholesale clients, including under a segregated mandate agreement with an institutional investor client. There are no specific requirements relating to the ability of an investment manager to delegate to third-party managers and advisers, provided that those parties are appropriately licensed and authorised.

Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?

An investment manager which is appropriately licensed and authorised under an AFSL can provide investment management services to clients other than AIFs, subject to appropriate governance and competency.

5 Marketing

Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?

The marketing of AIFs is regulated by the Corporations Act The regulatory requirements apply regardless of whether the fund is marketed to wholesale clients or retail clients. The entity marketing a fund must be licensed (ie, hold an Australian financial services licence (AFSL) or have the benefit of a particular exemption.

If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?

In order to engage in marketing activities in Australia, the promoter must hold an AFSL (or a ‘foreign AFSL'). A licence can be limited – for example, by allowing the entity to engage in dealing and advice activities (typically, marketing would cover either or both of these) to wholesale investors only. Although an AFSL may include authorisations that allow the holder to market funds to retail clients, the particular funds must first be registered in order to be offered to retail clients.

What is the process for obtaining authorisation and how long does this usually take?

The procedures for obtaining an AFSL differ according to whether the entity is an Australian incorporated and domiciled entity or whether it is a foreign investment adviser regulated by an approved foreign jurisdiction such as the US Securities and Exchange Commission or the Financial Conduct Authority.

To whom can alternative investment funds be marketed?

Alternative investment funds (AIFs) can be marketed to both wholesale clients and retail clients. If marketed to retail clients, the fund must be registered, and will be regulated, as a registered scheme and require a product disclosure statement. Depending on the type of AIF, the Australian Securities and Investments Commission (ASIC) has new powers under which it may deem the marketing of an investment in such a fund to retail clients as inappropriate and exercise its intervention powers.

What are the content criteria that marketing materials for alternative investment funds must satisfy?

The marketing rules are set out in the Corporations Act and ASIC policy. For example, in the case of an offer to retail clients, the marketing cannot be undertaken unless and until a disclosure document (called a ‘product disclosure statement') is available and the marketing materials refer to that document and the importance of investors obtaining a copy of and reading that document.

What other requirements or restrictions apply to marketing materials for alternative investment funds?

In the case of marketing generally – whether to wholesale clients or retail clients – ‘misleading and deceptive conduct' rules apply. These rules apply for all kinds of funds, whether alternative or not; but in the case of AIFs, they will be more closely scrutinised (especially if offered to retail clients), to ensure that investors are not given information that is misleading or deceptive (whether by inclusion or omission).

Offers to wholesale clients do not require a product disclosure statement, but will usually be made in the same way as they are made in many other jurisdictions – namely, using an information memorandum (or private placement memorandum), which is a private offering document and does not have prescribed content.

Wholesale clients comprise certain institutional, sophisticated and professional investors that meet relevant criteria prescribed by the Corporations Act For example, a person who provides an accountant certificate certifying net worth of at least A$ million (or annual gross income of at least A$, for the last two years) may qualify as a wholesale client. It is anticipated that ASIC will in due course tighten up aspects of the wholesale client definition.

Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?

Fund managers from outside Australia cannot actively market their fund in Australia unless they hold an AFSL or operate under an exemption. A new regime will be in place from 1 April for foreign fund managers to apply for a foreign AFSL as noted in question

Is the appointment of local marketing entities required in your jurisdiction?

Local marketing entities that hold an AFSL will be the only entities permitted to promote and distribute the fund and engage with clients and investors unless the foreign fund manager or fund promotor holds an AFSL or a foreign AFSL, or benefits from other exemption.

Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?

Foreign AIFs can typically be offered to wholesale clients in Australia without much restriction (subject to the licensing rules and the regulation of marketing activities and market conduct rules). In practice, foreign AIFs are rarely offered directly to retail clients in Australia, as there are many layers of regulation which apply to retail offerings, including stricter Australian licensing requirements and the need for the fund to be registered with ASIC.

ASIC has recently been provided with additional product intervention powers, which are aimed at regulating some product architecture. Additional design and distribution regulations will take effect in early and will require financial product issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products to retail customers. This will enable ASIC to prevent the offering of certain types of funds to retail investors where those funds are not suitable for retail investors (which could arise in the case of a complex investment fund that has limited withdrawal rights). The issuer and distributor will be required to identify the target market by making a target market determination for that product, and ensure that the product is distributed only to that market segment.

6 Investment process

Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?

No specified investment or borrowing restrictions apply to the portfolios of alternative investment funds (AIFs), subject to limited exceptions. If the fund is offered to retail clients with short-term withdrawal rights, then as a matter of structure, the fund must invest in assets which will enable that liquidity obligation to be met. Specific provisions in the Corporations Act deal with the difference between liquid and illiquid funds and the types of liquid investments which would be required to satisfy withdrawal requests.

Are there any specific legal or regulatory requirements regarding investments in particular assets?

Venture capital or private equity vehicles formed as venture capital limited partnerships or early stage venture capital limited partnerships must invest only in certain eligible venture capital investments (which excludes certain sectors, such as companies involved in the provision of finance, real estate or infrastructure; although it can include certain start-up fintech businesses).

7 Reporting, governance and risk management

What key disclosure requirements apply to alternative investment funds in your jurisdiction?

As alternative investment funds (AIFs) are usually offered only to wholesale (non -etail) clients, the key disclosure document is the information memorandum, however named, which must not contain information that is misleading or deceptive (whether by inclusion or omission).

What key reporting requirements apply to alternative investment funds in your jurisdiction?

Reporting, governance and risk management requirements differ according to whether the fund is registered or unregistered. For unregistered funds, this will depend largely on what is promised in the information memorandum.

What key governance requirements apply to alternative investment funds in your jurisdiction?

If the fund is offered to retail clients and is therefore registered, the trustee (responsible entity) must be appropriately authorised and a compliance committee must be established for the fund (unless more than half of the directors of the responsible entity are independent directors).

What key risk management requirements apply to alternative investment funds in your jurisdiction?

If the fund is unregistered (as is typically the case with AIFs that are offered to wholesale clients only), it will not be subject to any legislative reporting, governance or risk management requirements; but the licence-holding trustee or manager will be subject to legislative risk management requirements, including in relation to conflicts of interest and risk management processes.

Funds that are offered to retail investors and use an absolute return, hedge, infrastructure, mortgage or direct real estate investment strategy must report to investors annually based on a set of disclosure principles and benchmarks.

8 Tax

How are alternative investment funds treated for tax purposes in your jurisdiction?

Unit trusts investing in portfolio interests in financial assets, or ‘passively' investing in real estate to derive rent, will generally have flow-through tax treatment, and income and capital gains will be taxable in the hands of unitholders (if Australian tax residents) or on a withholding basis (from distributions to non-Australian tax resident unitholders).

A public unit trust that carries on a ‘trading business' for a relevant tax year is generally denied flow-through tax treatment and is treated as if it were a company for most tax purposes, including being subject to the applicable corporate tax rate. The cases in which a unit trust will be considered to carry on a ‘trading business' include:

• conducting real estate development or similar activities; or
• controlling, or having the ability to control, a trading business.

Taking into account these tax considerations, the Australian market developed what is known as a ‘stapled trust' structure, which generally involves investors being offered units in a trust (that restricts its activities to those necessary to retain flow-through tax treatment) stapled to units in another trust, or to shares in a company, that in either case carries on or controls a trading business (often using land or infrastructure leased to it by the trust). This structure became very common for investment in infrastructure such as toll roads, seaports and energy utilities. Although there has been long-standing use of these types of stapled structures, the Australian government recently enacted measures to limit the benefits of stapled structures –albeit with a transitional period of continuing favourable treatment for certain eligible arrangements. A 30% withholding tax rate on distributions of certain kinds of ‘non-concessional' income has been introduced, and may, for example, apply to investments in agricultural land or residential housing (other than affordable housing). At the same time, steps were taken to codify, and to an extent pare back, access to concessional tax treatment through flow-through trusts for foreign pension funds and sovereign entities.

There are special rules for eligible domestic investment trusts that are widely held, known as managed investment trusts (MITs). Unit trusts that are eligible to meet the criteria for MIT status may attract a concessional tax profile for non-resident investors, including (potentially):

• flow-through of tax treaty rates on dividends, interest and royalties;
• a concessional withholding tax rate (15%) on distributions of other Australian source income, such as rental income by real estate-based MITs; and
• tax-free treatment of non-Australian source income and capital gains.

Additionally, MITs can elect for capital account treatment of gains on the realisation of eligible investments (subject to various exceptions, including land held as trading stock, debt interests and certain financial arrangements), which may be advantageous to both Australian and foreign resident investors. For example, non-resident investors are subject to withholding tax under the capital account election only in relation to gains from the disposal of an interest held (directly, or in some cases, indirectly) by the MIT in real property situated in Australia (defined broadly). Australian resident individuals and superannuation funds, on the other hand, can access discounted capital gains tax treatment where the relevant investment was held by the MIT for at least 12 months.

Eligibility for MIT status requires the following, among other things:

• Certain investment management decisions are made within Australia;
• The trust meets a widely held requirement (which may potentially also be satisfied if a substantial part of the unitholder base comprises certain types of widely held investors, such as pension funds); and
• The trust has an investment strategy that excludes the taking of controlling interests in portfolio entities that carry on a trading business.

Unit trusts may be operated in any manner as determined in the trust deed adopted by the trustee, which may, for example, provide for operation as either an evergreen or closed-end fund. For taxation purposes, MITs may elect to be treated as ‘attribution MITs' which, among other things, permits the trusts to attribute income and gains of different character to different members in accordance with entitlements under the trust instrument. It also allows the trusts to correct errors or delays in finally ascertaining trust income by making adjustments in the year the need for correction is discovered, rather than having to reopen prior year distributions and tax filings.

While foreign investment funds will not generally be subject to Australian capital gains tax on portfolio investments in Australian businesses, capital gains tax can be incurred in the case of non-portfolio investments in companies, trusts or limited partnerships holding land or mining assets – for example, an interest of 10% or more in an entity for which more than 50% of its asset value is attributable to ‘taxable Australian property' such as real estate or mining or petroleum interests.

Some controversy has arisen as to how these rules apply to investments by foreign limited partnerships which are eligible for flow-through treatment in the home jurisdictions of the investing partners (eg, the United States) and hence arguably entitled to flow-through tax treatment under Australian tax treaties with those jurisdictions. Litigation in the federal courts has not yet finally resolved the issue, but has apparently concluded that the limited partnership itself cannot claim the benefit of the treaty protections for transparent vehicles (Commissioner of Taxation v Resource Capital Fund IV LP [] FCAFC 51).

Limited partnerships are generally treated under Australian tax law as companies – that is, they are taxed at the company tax rate and do not offer flow-through tax treatment. However, exceptions to this general rule apply to limited partnerships that are registered with the Australian government to engage in eligible venture capital investment activities. These types of limited partnerships can be used for certain venture capital and certain private equity investment strategies. Legislation provides for registration of venture capital limited partnerships (VCLPs), early stage venture capital limited partnerships (ESVCLPs) and Australian venture capital funds of funds (AFOFs). Each of these may be eligible for certain capital gains tax concessions on qualifying investment activities. For example, eligible foreign investors will generally not be subject to Australian tax on realised capital gains by VCLPs on eligible venture capital investments held for at least 12 months. The concessional treatment of eligible venture capital investments has been supplemented by a regime for ‘early stage innovation companies' (ESICs) that includes an upfront tax offset for up to 20% of the value invested (but capped at $,) and a capital gains tax exemption for ESIC shares held for at least 12 months, but less than 10 years. Early stage investor tax concessions may also be available to start-up fintech businesses for investments made after 1 July

How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?

Australian investment fund managers and advisers are generally treated in the same way as regular taxpayers. In general, income and other rewards for management or advisory services will be taxed as ordinary income; there is a capital gains tax treatment for carried interests in venture capital partnerships in certain cases.

Foreign investment fund managers and advisers are generally exempt from Australian taxation, provided that they do not have a permanent establishment in Australia; but in some cases they may be taxed on Australian-sourced fee income – for example, if operating through a dependent agent in Australia. Distributions of carried interests from a MIT may in some cases be deemed to be Australian-sourced income.

Foreign investment funds using Australian-based managers, advisers or agents need to be careful not to establish a taxable Australian presence. In , the tax laws were amended to introduce the investment manager regime (IMR), to enable an IMR-compliant foreign fund to retain its non-resident tax status for qualifying portfolio investments if its Australian presence is limited to using an eligible independent Australian fund manager. The IMR also confirms that qualifying portfolio investments will not be subject to Australian income tax where they are held by eligible widely held foreign funds that do not have an Australian manager and do not otherwise have a permanent establishment or trading business in Australia.

How are alternative investment fund investors treated for tax purposes in your jurisdiction?

There is generally flow-through of tax in funds which are structured as unit trusts so that investors typically share their tax burdens proportionate to their holdings in the funds (see question ).

What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?

Australia has enacted legislation to implement the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) in Australia. Managers have updated their onboarding processes to capture information needed to meet the compliance obligations attached to FATCA and CRS.

What preferred tax strategies are typically adopted in the alternative investment fund context?

The unit trust structure is the most commonly used because of its flow-through tax treatment and potential access to concessional tax treatment of distributions to foreign investors. Some private equity and venture capital funds are structured as VCLPs, ESVCLPs and AFOFs. See question above for more information.

9 Trends and predictions

How would you describe the alternative investment fund landscape and prevailing trends in your

The landscape for alternative investment funds (AIFs) in Australia is promising, especially for the pension industry. The pool of investable capital from Australian superannuation funds (comprising both large public offer funds and self-managed superannuation funds) is among the largest in the world (largely due to the compulsory retirement savings regime introduced in the s). Superannuation funds are constantly on the lookout for investment opportunities which may provide enhanced returns for their members. Many foreign investment managers and distributors and advisers are generally familiar with the Australian sophisticated and professional investor's style, local investment fund structures and tax issues, and many are therefore comfortable with establishing satellite or feeder funds for Australian investors.

Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?

Corporate and limited partnership fund structures: In the – budget, as part of the Ten-Year Enterprise Tax Plan, the government announced that it would introduce tax and regulatory frameworks for two new types of collective investment vehicles (CIVs): the corporate collective investment vehicle (CCIV) and the limited partnership CIV. On 19 January , the Treasury released comprehensive exposure drafts of both the regulatory and tax legislation for the CCIV regime. However, the relevant legislation is still to be enacted at the time of writing. The CCIV regime enables asset management firms to structure an investment fund as a corporation and is designed to be an internationally recognisable investment vehicle that can be marketed to foreign investors. Legislation facilitating more widespread use of a limited partnership structure is also proposed (currently, limited partnerships are used only in the private equity and venture capital sectors), and it is hoped will follow closely after finalisation of the CCIV legislation. The overarching aim of such legislation is to provide a choice of tax-transparent structures (unit trusts, corporations or limited partnerships), but with equivalent governance features. The introduction of these alternative structures reflects industry feedback that corporations and limited partnerships are more familiar legal structures in many markets outside Australia, including across Asia. The new structures aim to complement other recently enacted legislation (the Corporations Amendment (Asia Region Funds Passport) Act ) aimed at facilitating the cross-border marketing of similarly regulated fund products across jurisdictions that are signatories to the new Asia Region Funds Passport regime (initially Australia, South Korea, Thailand, New Zealand and Japan).

Tighter measures for the retail investor environment: As noted above, the new Australian Securities and Investments Commission intervention powers and product design and distribution obligations will change the landscape for AIFs offered to retail clients.

Advisers and other distributors of alternative investment funds will also need to have regard to the Financial Planners and Advisers Code of Ethics introduced by the Financial Adviser Standards and Ethics Authority. The code aims to ‘professionalise' the retail client advisory sector by introducing various ethics-based duties and standards.

Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?

Over the next 12 months, we expect that there will be continued government initiatives to enhance the establishment and prospering of technology based and venture capital funds (for structures, see question ), as in the past few years. This undertaking is being promoted and managed by the Department of Industry, Innovation and Science.

Real estate investment funds have for many years been a large and important part of the investment landscape in Australia, mainly for industrial and commercial property investments. New types of specialised property investment funds are being established to fill emerging needs and markets – for example, student accommodation funds, disability housing, child care/education facilities, defence force personnel housing and other areas of special need.

Other types of AIFs likely to grow in the near future are climate change and impact investing funds (there has already been rapid growth in ethical investment funds), high-yield corporate bonds and other investment types designed to provide a decent return in a low inflation, low interest rate environment.

Private equity funds in Australia largely adopt the best practice reporting and valuation guidelines formulated by their industry body, the Australian Investment Council (AIC) (formerly the Australian Private Equity and Venture Capital Association). The AIC represents private equity, private credit funds, sovereign wealth and other institutional investors (including large superannuation entities), and are largely aligned with the private equity principles formulated by the Institutional Limited Partners Association. As the domestic private equity funds industry continues to attract significant investment from foreign investors, we also expect to see the continued alignment of domestic private equity funds terms with those in other developed private equity markets.

10 Tips and traps

What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?

The introduction of alternative collective investment structures, coupled with the Asia Region Funds Passport, should assist Australian asset managers to more effectively access foreign investor markets. Australian managers should continue to be supported by the reforms of several years ago (and since adopted in practice) under the investment manager regime (see question ), which removes some traditional tax uncertainty associated with foreign funds engaging with Australian managers.

In terms of foreign asset manager access to the Australian investor market, the new foreign Australian financial services licence regime will involve an upfront cost in the associated application process. This should, however, provide certainty for managers in terms of a clear pathway for access to the Australian market and enhance Australian investor confidence associated with engaging with foreign managers.

The industry is expecting sustained foreign investor interest in Australian real estate, agriculture and infrastructure investment exposure. MIT structures are becoming understood by more and more well-known large foreign investors, and accepted as the gateway necessary to access a concessional withholding tax profile and deemed capital account election.

Acknowledgement: co-authored by Special Counsel Stephen Etkind

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kim Ivey, the head of the Australian chapter of the Alternative Investment Management Association (AIMA) is upbeat. "One of the important features of Australia's hedge fund industry is that there are many local managers who have not yet been discovered by investors in the rest of the world. For many of the investors, Australia is just too far away. The country cannot be reached in one hour's plane ride from London, New York or Geneva. A part of the opportunity is that Australian managers still have capacity."

This is a point which has not been lost on other observers of the Australian scene. Notes Ephraim Grunhard, a portfolio manager for PSS/CSS (the Canberra-based pension funds of Australia's federal public servants): "Offshore managers are increasingly beginning to look at Australian hedge funds. More and more money has been chasing hedge fund capacity. The time allowed for the hedge fund selection decision has been reduced. Some strategies are showing signs that they have had the life arbitraged out of them."

Adds Colin Taylor, Director-Sales & Marketing of Prime Services with UBS in Sydney, " saw an increasing number of North American investors travelling to this region, with many willing to make an investment with local managers. However, because of the sizes of the allocations that these foreign investors were looking to make, they often had to work with several managers to satisfy their requirement.

"Several Australian managers tapped into this flow of capital. Many established managers who had been offering locally domiciled products to Australian investors looked at the possibility of running 'mirror' products that are domiciled offshore".

Prime brokers

One of the challenges for Australian managers is that there have effectively been barriers to entry to prime brokers in what is still only a small market place. Most observers agree that the total assets under Management of the Australian hedge fund community is about the same as Australian investors' holdings of hedge funds &#; at just A$20 billion (US$15 billion) or so.

UBS is generally reckoned to account for around 60% of the unleveraged hedge fund assets that are managed from Australia, and about 70% of the local managers. Its main competitors as prime brokers are Goldman Sachs and Morgan Stanley.

Colin Taylor argues that UBS' dominant position comes from a number of factors. Unlike its rivals, UBS had a presence on the ground in Australia and was well placed to use Australia's regulatory and tax requirements as a competitive advantage. UBS had a stronger local investment banking franchise than the other prime brokers. It was able to provide a wide range of services to local managers through a single platform, regardless of where the managers had domiciled their funds.

Even a brief discussion with a local fund-of-hedge funds manager about Australian-based investors' demand for hedge funds reveals a number of idiosyncrasies. For instance, David McKenzie, the Director of Institutional Investor Services with Russell Investment Group in Sydney, emphasises that demand for hedge funds tends to be concentrated in a limited number of pension funds and tends to focus on two kinds of products &#; funds of funds and long/short equities. (See Separate Q&A Section)

Nevertheless, the market for hedge funds does not end with institutional investors in Australia. Notes AIMA's Ivey: "One of the key trends has been retail investors' growing interest in hedge funds. The local regulatory regime means that fund promoters can reach retail investors provided that they have a locally domiciled product. Some of the master funds and other platform operators have looked for suitable single strategy products &#; and especially long/short equity funds."

"This has had implications for marketing of hedge funds. Local single-strategy managers have had the greatest opportunities with promoters of local retail products and with overseas-based investors. Conversely, it seems to us that those local pension funds who are actually using hedge funds have tended to seek large, offshore-domiciled, funds of funds."

Several observers suggest that retail investors' approach to hedge fund investing has been different to that of the pension funds and other institutions. One commentator, for instance, is Peter Coates, a Senior Investment Manager at HFA Asset Management, one of the leading local fund of funds managers. (See Separate Q&A Section) He suggests that retail investors were quicker, at least initially, than pension funds and other institutions to embrace the concept of absolute return investing.

Notes Dragana Timotevic, a Principal at Mercer Investment Consulting: "On balance, it is probably fair to say that retail investors led the way in terms of actually using hedge funds. Overall, though, the institutional investors have had more choice in terms of the variety of products that are available to them."

A plethora of alternative investment choices

One of the key aspects of the Australian hedge fund arena that sets it apart from those of other countries is that there is very widespread acceptance of the merits of non-traditional asset classes. The challenge is that non-traditional opportunities in Australia include direct and listed property, private equity, infrastructure funds, tax-advantaged forestry and agricultural investments, plus various other vehicles besides hedge funds and funds of hedge funds.

HFA's Coates and Russell's David McKenzie, representing leading fund-of-fund and multi-manager groups that are respectively focused mainly on retail and institutional investors, contend that the plethora of non-traditional, non-hedge fund vehicles that are available in Australia presents a challenge. Some pension funds and some consultants do not consider hedge funds separately from other non-traditional asset classes. Essentially, hedge fund promoters face meaningful competition for the investment dollar from a variety of quarters.

However, this view is not universal. PSS/CSS' Ephraim Grunhard, for instance, does not think that the usage of hedge funds is constrained by the availability of REITs, infrastructure funds and other proven non-traditional vehicles. Mercer's Timotevic suggests that investors recognise that many non-traditional vehicles provide superior income or greater stability of returns, especially when combined with other asset classes. "However, the other non-traditional vehicles usually offer different risk/return propositions to hedge funds &#; and this is widely understood," she says.

Long-only still delivers

Perhaps the greatest obstacle to the further development of hedge funds in Australia comes from the local stockmarket. In the world's largest hedge fund markets &#; the USA, Europe and Japan &#; interest in hedge funds was boosted by the poor performance of local stockmarkets. Investors could see a compelling reason to diversify away from local equities.

In Australia, on the other hand, the local stockmarket has consistently performed well. Australia largely missed out on the boom in technology, media and telecommunications shares in the late s, but it also largely escaped the subsequent bust. Its world class natural resource companies have been seen as key beneficiaries of the rise in the price of energy and other raw materials. In part because many of the key industries are oligopolies, the earnings of listed companies have risen steadily at a time that domestic demand has been robust.

Equally importantly, local equities have been a core asset class for both retail and institutional investors. Retail investors have been attracted to the local stockmarket by the favourable tax treatment of dividends and by initial public offerings, some of which have resulted from the privatisation of state-owned enterprises.

Perhaps because defined contribution schemes are more common in Australia than in some other countries, the pension plans have seen local equities as an attractive offset to their long-term liabilities.

In the event that the Australian equities market disappoints local investors in a big way in the coming year or so, it is quite possible that there will be a new, and significant, shift towards non-traditional assets. However, hedge funds will not be the only beneficiaries.

Australia's hedge fund market at a glance
 

• Total AUM of Australian-based hedge fund managers: cA$20 billion (US$15 billion).
• Investors' holdings of hedge funds: c$A20 billion (US$billion) or around 3% of retirement assets.
• Estimated number of pension funds that use hedge funds: 32% (according to Russell survey).
• Australian investors' favourite strategies: funds of funds and long/short equity.
• Locally domiciled retail products: significant and arguably led acceptance of absolute return investing in Australia.
• Dominant prime broker: UBS, with apparently % market share.
• Apparent constraints on development of Australian hedge fund industry: strong performance of local stockmarket; widespread availability of non-traditional vehicles other than hedge funds

What are the key features of HFA's approach to fund of hedge fund management that you would emphasise?

All of our fund of fund products focus, to varying degrees, on absolute returns, capital preservation and the diversification of traditional portfolios. Our flagship product &#; HFA Diversified &#; has a history of delivering consistent positive returns with low instance and depth of loss, together with excellent diversification away from equities, bonds, credit, commodities and property.

The HFA International Shares Fund makes allocations to around 15 equity stock pickers based around the world in their geographic market of expertise. This vehicle is an international equity alternative with the ability to produce non-market-directional returns, limit any loss caused by a market downturn and to diversify away from both the global stockmarket and from individual equity managers.

The HFA Australian Shares Fund has a similar mandate and objective to HFA International Shares Fund, but invests in domestic managers and strategies. This fund provides an alternative to the traditional allocation to Australian equities and typically has a net market exposure of around 15%.

How have Australian retail and institutional investors responded to the opportunities of investing in hedge funds?

We found that retail investors were initially much more accepting of the philosophy of absolute returns than were institutional investors. In essence, retail investors' objectives were closely aligned with our own &#; to make positive returns whenever possible, rather than to be beholden to a volatile index.

Trends of hedge fund usage by Australian pension funds and other institutions are changing. When the institutions first made allocations to hedge funds and absolute return funds, they typically began by using international/global funds of hedge funds. These funds of funds were usually domiciled outside Australia and generally managed in excess of US$10 billion. The institutions wanted a feeling of comfort and they found it in large funds.

Increasingly, the large funds are achieving returns that are becoming "commoditised". Accordingly, the Australian pension funds are more and more focusing on flexible and nimble boutique funds of hedge funds &#; which are usually managing less than US$5 billion &#; to meet their objectives.

Of course the pension funds were also keen to find alternatives to traditional long-only investment in Australian equities. Initially, they tended to use locally based single strategy managers who were offering quantitative equity market neutral products. This was a quite different approach to that which we, and other fund of hedge fund managers, were following: we were making allocations to niche, opportunistic Australian managers.

Now it seems that some Australian pension funds have realised that picking single-strategy hedge fund managers is harder than picking traditional long-only managers, in part because the dispersion of returns from the various managers and strategies is that much greater. However, we have not yet seen a trend for Australian pension funds to make allocations to opportunistic boutique single managers. Nor do they seem to have made allocations to local funds of hedge funds, who are increasingly filling their capacity offshore.

To what extent are hedge funds competing with other non-traditional investment opportunities in Australia?

Unfortunately, hedge funds are in competition with other non-traditional opportunities in this country. It seems to us that some investment consultants, and particularly those that are focusing mainly on retail products, have not progressed from the view that all "alternative investments" should be classified together. They include hedge funds, funds of hedge funds, infrastructure funds, forestry and agricultural investments, private equity, direct property and commodities in one, all-encompassing, investment category. This is in spite of the fact that each of these non-traditional asset classes have different risk-return qualities and do not respond in the same way to various trends in capital markets.

More progressive investors have recognised that these various non-traditional asset classes have different qualities and characteristics and have taken a suitably disciplined approach to building their portfolios. In many cases, these investors have been attracted to the consistently defensive qualities of a well-managed fund of hedge funds

What are the key features of Russell Investment Group's approach to fund of hedge fund management that you would emphasise?

We would stress that the philosophical justification for fund of hedge fund investment is clear and strong. In the first instance, hedge funds are a good place to find alpha. In the second, the fund of funds approach provides good diversification of risk &#; which is arguably more important with hedge funds than with conventional long only managers. We look for underlying managers that clearly have a competitive edge and a compelling story.

What do you see as the main additional risks that hedge funds carry relative to long-only managers?

Operational risk is something that we pay a lot of attention to. For instance, we consider the extent to which the hedge fund manager is dependent on the insights of one or two senior individuals. We also consider the possible implications of a hedge fund manager going out of business. Suppose a pension fund with a conventional long-only segregated portfolio learns one day that an underlying manager has gone out of business. The pension fund will be able to exert control over the portfolio very quickly, because it has the primary relationship with the custodian. There may well be transition management issues to be dealt with, but the potential fall out is limited.

Then suppose that the pension fund has allocated money to a hedge fund manager that has ceased operations. The pension fund will almost certainly have invested through a fund rather than a segregated portfolio. There will of course be a custodian, but its primary relationship will be with the hedge fund manager not the pension fund: it will be harder for the pension fund to re-exert control. To the extent that the hedge fund manager has been using leverage, it is conceivable that the possible losses will exceed the amount of money invested by the pension fund in the hedge fund.

How would you describe the Australian hedge fund industry?

We see the Australian hedge fund industry as one that is growing, but neither rapidly nor evenly. In our annual survey of local pension (superannuation) funds, which was completed earlier this year, we found that about 32% of all pension funds are using hedge funds. However, hedgefunds are much more important to some parts of the pension community than others. They are, for instance, very widely used among the industry funds (i.e. the not-for-profit pension funds associated with Australia's trade union movement and which account for roughly 10% of overall pension assets).

Conversely, hedge funds are not widely used by Australia's corporate pension funds. They are focusing on the new licensing requirements and the implications of the new choice-of-fund legislation. They may not be averse to the idea of using hedge funds, but they have other issues to deal with in the short term.

Most estimates suggest that the Australian pension funds hold around A$20 billion in hedge funds &#; or roughly 3% of total assets under management. However, we have found that those pension funds that actually use hedge funds typically have allocations that are twice this size at around 6%.

The other feature of the Australian hedge fund industry that we would emphasise is that it is highly concentrated. Our survey found that local pension funds overwhelmingly focused on two types of products. One, as might be expected, is multi-strategy funds of hedge funds. The other is funds that are following long/short equity strategies.

Did the comparatively disappointing performance of hedge funds in have an impact on the Australian industry?

In Australia, the issue has not been the performance of hedge funds &#; and, in particular, the fairly pedestrian returns that were garnered during The real problem is that the local stockmarket has performed so well, both in absolute and relative terms. Thanks to the boom in commodity prices, a fairly robust local economy and good corporate profit results, long-only investors have made good money from Australian equities &#; which represent an important asset class for the local pension funds. Even in a reasonably sophisticated financial services industry, it can be hard to make the case for diversification into alternatives when the traditional asset class(es) are delivering good returns.

Conversely, the typical pattern in other countries is that demand for hedge funds has picked up when local stockmarkets have performed poorly. In the USA, for instance, interest in hedge funds grew substantially in the wake of the bursting of the technology, media and telecommunications bubble in early One of the reasons why Japan is an important market for hedge funds is that the local stockmarket has performed in a disappointing fashion for much of the 6 years or so since the major indices peaked.

To what extent are hedge funds competing with other non-traditional investment opportunities in Australia?

Even if a pension fund is philosophically committed to allocating 6% &#; or even more &#; of its assets to non-traditional asset classes, it will almost certainly have to make a corresponding reduction to its existing portfolios of local equities, local fixed income, international equities and so on. The pension fund can consider real estate investment trusts (or listed property trusts, as they are generally known in Australia) which are well established. The country is also widely recognised as a leader in the development of infrastructure funds. Private equity funds are available as, of course, are hedge funds. The bottom line is that the hedge fund managers of the world probably face more competition from providers of a wide variety of non-traditional vehicles in Australia than they would in other countries.

What does all this mean for Australian hedge fund managers who are keen to promote their services?

There are undoubtedly opportunities for the Australian-based hedge fund managers. However, their marketing needs to be targeted carefully. Within Australia, the most prospective clients are the industry funds and some other pension funds. They should also be able to do good business with foreign-based funds of hedge funds.

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As some alternatives are not as sensitive to the economy as others, they can provide relatively attractive yield opportunities while capturing relatively less market risk² in the current environment.

For example, while many investors seek more income in global high-yield bonds, such bonds have a higher correlation to equity markets and represent a higher risk, when compared with government bonds. Sectors such as transport, direct lending, and global infrastructure can offer relatively attractive yields, as illustrated in the chart below.

Alternative sources of income

Source: Alerian, Bank of America, Bloomberg Finance L.P., Clarkson, Drewry Maritime Consultants, FactSet, Federal Reserve, FTSE, MSCI, NCREIF, Standard & Poor’s, J.P. Morgan Asset Management. Global transport: Levered yields for transport assets are calculated as the difference between charter rates (rental income), operating expenses, debt amortisation and interest expenses, as a percentage of equity value. Asset classes are based on NCREIF ODCE (Private real estate), FTSE NAREIT Global/USA REITs (Global REITs), MSCI Global Infrastructure Asset Index (Infrastructure assets), MSCI Global Property Fund Index –North America (U.S. Real Estate), MSCI Global Property Fund Index –Asia-Pacific (APAC real estate), Global Bloomberg Barclays U.S Convertibles Composite (Convertibles), Bloomberg Barclays Global High Yield Index (Global HY bonds), J.P. Morgan Government Bond Index EM Global (GBI-EM) (Local currency EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), MSCI Emerging Markets (EM equity), MSCI Europe (European equity), MSCI USA (U.S. equity), ASX (Australian equity). Transport yield is as of , Infrastructure and real estate Past performance is not a reliable indicator of current and future results. Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return. Data as of

The Hedge Funds Rock & The Australian Alternative Investment Awards were held by live broadcast last night. A large, diverse viewing audience from over Australia and the Asia Pacific region logged on to view a free live performance broadcasted from a mobile studio in the Hyatt Regency hotel at Darling Harbour, Sydney.

Kim Ivey, HFR co-founder and Chairman of the Alternative Future Foundation: “Our thanks to all the sponsors, production crew, judges, event staff, partners, fund managers and viewers for being part of last night’s HFR and The Australian Alterative Investment Awards. In addition to seeing who the best alternative investment managers are in Australia, viewers were entertained by 2 live sets from Diesel and the great work of our guest MC, Tom Williams. Viewers also had the opportunity to also hear directly from the charities that the Foundation supports and to donate directly to all of these causes. Our congratulations to all the winners and finalists in all the various award categories.”

Best Private Debt Fund
Merricks Capital Partners Fund (w)
Metrics Credit Partners – Secured Private Debt Fund I
Metrics Credit Partners – Diversified Australian Senior Loan Fund

Best Long/Short Equity Fund
Munro Global Growth Fund (w)
Bennelong Long Short Equity Fund
Alceon High Conviction Absolute Return Fund

Best Market Neutral Fund
Karara Market Neutral Plus Fund (w)
Bennelong Market Neutral Fund
Levitas Absolute Return VIX Fund

Best Multi-strategy Fund
Janus Henderson Alphagen Multi-Strategy Fund (w)
Legg Mason Tactical Allocation Fund
Cor Capital Fund

Best Global Macro/Futures Fund
QDRA Dynamic Macro Fund (w)
P/E Global FX Alpha Fund
JP Morgan Global Macro Opportunities Fund

Best FI & Credit Fund
PIMCO Australian Focus Fund (w)
Janus Henderson Global FI Total Return Fund
Realm Capital Series

Best Listed Alternative Investment Product (only 1 winner, 1 finalist)
Monash Absolute Investment Company Limited (w)
Schroeder Real Return Fund

Best Emerging Manager
Revolution Asset Management (w)
Apollo Capital
Octopus Investment Australia

Best Investor Supporting Australian Managers Award
Ironbark Asset Management (w)

Best Offshore Manager Operating in Australia Award
J.P. Morgan Asset Management (w)
Invesco Australia
Franklin Templeton

Best Alternative Investment Manager Award
Winner &#; Metrics Credit Partners

Contribution to the Industry Award
Winner &#; Ms. Nikki Bentley

About The Alternative Future Foundation, Hedge Funds Rock and the Awards.
The AFF is an ACNC registered charity with DGR status whose purpose is to help build positive alternative futures for disadvantaged Australians and their families. AFF is the organiser behind Hedge Funds Rock which began in as a fundraising and music enthused networking event for the alternative investment industry. The Australian Alternative Investment awards began in All profits are distributed to charity.

Alternative Future Foundation Media Release &#; 11 September

© Hedge Funds Rock and the Australian Alternative Investment Awards. All rights reserved. The information, data, analyses, and opinions contained herein include the proprietary information of Hedge Funds Rock and the Australian Alternative Investment Awards and may not be copied or redistributed without prior approval, do not constitute investment advice offered by Hedge Funds Rock and the Australian Alternative Investment Awards and are provided solely for informational purposes and therefore are not an endorsement of a fund or fund manager. Hedge Funds Rock and the Australian Alternative Investment Awards shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. Hedge Funds Rock and the Australian Alternative Investment Awards does not guarantee that a fund or fund manager will perform in line with its nominated award as it reflects past performance only. Likewise, any award should not be any sort of guarantee or assessment of the creditworthiness of a fund or fund manager or of its underlying securities and should not be used as the sole basis for making any investment decision.