Leverage for hedge funds capped at twice asset size

Now, an India hedge fund with Rs 100 crore in assets can take bets worth Rs 200 crore at most, as per circular put up on Sebi website

The Securities and Exchange Board of India (Sebi) has restricted leverage for domestic hedge funds to twice their assets, far lower than the leverage global hedge funds are said to apply.

Now, an India hedge fund with assets of Rs 100 crore can take bets worth up to Rs 200 crore, according to a circular put up on the Sebi website on Monday. “The leverage for a category-III AIF (alternative investment fund) shall not exceed two times i.e. the gross exposure after offsetting for hedging and portfolio rebalancing transactions,” said the circular.

Informally, the regulator has been asking AIFs to provide undertakings capping leverage at two times, according to a source. Sebi has also asked category-III AIFs to report their leverage to the custodian on a daily basis and mention whether there was a breach of the limit during the day. In case of a breach, a fund would have to send a report to all clients before 10 am the next working day, stating there was a breach in the limit, along with reasons for that. It would also have to square off the existing exposure and lower the leverage by the end of the next working day.

The regulator has also asked the custodian to inform Sebi of breaches, providing the name of the fund, the extent of the breach and the reasons for that the same before 10 a.m. on the next working day.

The Sebi circular suggested exceeding the leverage limit might lead to regulatory action, despite subsequent attempts to correct the situation. “This shall, however, not prejudice any action that may be taken by Sebi against the AIF under Sebi (Alternative Investment Funds) Regulations, 2012, or the Sebi Act,” it said.

AIFs that avail of leverage have also been asked to comply with reporting norms on a monthly basis; those that don’t avail of leverage would have to report on a quarterly basis.

The regulator has also barred any suspension on redemptions for open ended category-III AIFs, except in the case of exceptional circumstances or for regulatory compliance. The regulator, as well as investors, would have to be kept in the loop on a fund’s actions during the time of the suspension, the circular said.

Sebi has also asked leveraged funds to maintain a record of their trades and make it available to Sebi when required. Also, these funds have to provide information on conflicts of interest.
REGULATOR RESTRICTS LEVERAGE

• Excess leverage to be squared off next day
• Breaches could invite action
• Funds to inform regulators if breach occurs
• Monthly reporting for leveraged funds, quarterly for others