Offering document
The offering document of an authorized fund (often referred to as an explanatory memorandum or a prospectus) should provide a detailed roadmap to potential investors. However, not all investors read it, why?
3 Myths About the Need to Read the Prospectus
1. I don't need to read the prospectus because the SFC has approved it.
This is a dangerous misunderstanding. Approval by the SFC does not necessarily mean that the fund is a "sure-win" product. You do need to read through the prospectus to decide if it's a good investment for you. The SFC cannot make this decision for you.
2. Flyers, fact sheets and advertisements are good enough for me.
The flyers, fact sheets and advertisements etc only reflect partial information about the fund. You may miss some important information about the fund if you simply rely on these advertising materials that are prepared from a marketing angle. You should read the prospectus to make an informed investment decision before you subscribe to the fund.
3. The prospectus is too lengthy and complicated for me.
Remember, you are making investments of your own hard-earned money. So, it's really worthwhile to spend some of your time to thoroughly understand the fund before you invest. Consult your financial advisers if you have any questions in understanding the prospectus.
Guide to Reading a Hedge Fund Prospectus
Before rushing to commit yourself,
- You need to Understand the product
- You need to Understand the risks
- You need to Know how much it will cost
- You need to Recognize who is looking after your investments
- You need to Understand when and under what circumstances your investment may be interrupted
- You need to Know where to find additional information
Understand the product
1. What does the hedge fund aim to achieve? Does it meet my investment objective?
Find out the investment objectives and policies of the hedge fund, including the type of hedge fund strategy.
Usually found in the "Investment Objectives and Policies" section
In case of guaranteed hedge funds, check out the details of the guarantee as well.
Usually found in the "Guarantee" section
2. What does the hedge fund invest in? Are there any limits that the hedge fund should follow?
Find out the financial tools that the hedge fund employs, the investment and borrowing limits and any use of derivatives.
In case of funds of hedge funds, look for the due diligence process adopted by the fund manager for the selection of underlying funds and on-going monitoring of their activities.
Usually found in the "Investment and Borrowing Restrictions" section
3. Are there any requirements on the size of my investment?
Find out the minimum subscription and minimum holding amounts of the hedge fund.
Usually found in the "Subscriptions" section
4. How quickly can I get my money back? What are the dealing days?
Find out the procedures for redemption and conversion including the maximum time period for you to get back you redemption proceeds.
Usually found in the "Redemptions / Conversions" section
Understand the risks
1. What are the risks that I may encounter in investing in the hedge fund?
Read the cover page of the hedge fund's prospectus. It prominently spells out warning statements with respect to risks associated with hedge funds. Find out more about the specific risk factors in the main text.
Usually found in the "Risk Warnings" section
Know how much it will cost
1. Find out the nature and level of fees and charges charged to you at different times:
- Upfront fees (e.g. initial charge) are payable upon subscription;
- On-going fees (e.g. management fees, performance fees, trustee/custodian fees, other operating expenses and out-of-pocket expenses) are payable during the life of the fund; and
- Exit fees (e.g. redemption charge) are payable when you leave the fund.
In case of funds of hedge funds, also check out the fees and expenses charged at the underlying funds level.
Usually found in the "Fees and Charges" section
Recognize who is looking after your investments
1. Who are the parties involved?
Find out the people behind the product. The key operating parties includes:
- the Fund Manager who manages your investment;
- the Trustee/Custodian who safekeeps your assets;
- the Valuation Agent who values the fund's assets; and
- the Hong Kong Representative of the overseas Fund Manager who provides information on the hedge fund to you etc.
In case of guaranteed hedge funds, also look for the Guarantor who promises that you will get back the guaranteed amount if you meet the guarantee conditions.
Usually found in the "Management and Administration" section
Understand when and under what circumstances your investment may be interrupted
1. What are the exceptional circumstances under which the operation of the fund may be affected?
Find out the conditions leading to suspension.
Usually found in the "Suspension of Dealings" section
2. Will the fund terminate?
Find out the duration of the fund and conditions under which the fund may be terminated.
Usually found in the "Termination" section
Know where to find additional information
1. How do I find out the latest fund price?
Find out which newspapers (both English and Chinese) will publish the latest fund price.
Usually found in the "Publication of Net Asset Value" section
2. Will I receive on-going reporting about my investments?
Find out the periodic reports which will be issued to you on a regular basis as required by the SFC:
- Audited annual report (within 4 months of the year end; and within 6 months in case of funds of hedge funds);
- Unaudited semi-annual report (within 2 months of the period end); and
- Quarterly report (within 1 month of the quarter end; in within 6 weeks in case of funds of hedge funds).
Usually found in the "Reports and Accounts" section
3. What other information can I locate?
Find out the constitutive documents of the fund as well as other important legal agreements which will be available for your inspection free of charge at the office of either the local Fund Manager or the Hong Kong Representative of the overseas Fund Manager.
Usually found in the "Documents available for Inspection" section