The International Organization of Securities Commissions Monday published its proposed best practices for the regulation of funds of hedge funds.

The standards aim to address investor protection issues that have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds, IOSCO explains. In particular, a previous IOSCO report singled out liquidity risk, and the due diligence process used by funds of hedge funds’ managers prior to and during investment.

IOSCO has developed several proposals for both of these areas. In terms of due diligence, the report sets out practices for dealing with elements that require constant monitoring by funds managers, ensuring adequate resources, regularly assessing selection procedures for eligible underlying funds, and the issue of outsourcing due diligence.

The group notes that these standards form part of a larger body of work that IOSCO has developed in terms of dealing with hedge funds. Most recently, in June, it published six high level principles designed to enable securities regulators to address the regulatory and systemic risks posed by hedge funds.

IE