Adding Yield to Stable Portfolios: Regulating Investments in Australian Hedge Funds

Abstract:     
This article provides an overview of the Australian hedge fund sector and considers whether hedge funds are appropriate investments, under Australian law, for investment fiduciaries.

Under Australian law, fund managers, pension trustees and other investment fiduciaries must act prudently when investing the funds entrusted to them. The traditional formulation of this duty accords paramount importance to the preservation of the capital of the fund. On this basis, it is almost certain that fiduciaries would be barred from investing in hedge funds. It is, however, likely that the Australian courts will follow the lead of the English and United States courts in recasting this duty in terms of modern portfolio theory, thus bringing hedge funds within the universe of (potentially) permissible investments for fiduciaries. In addition, this article examines the Australian law on the delegation of investment powers by fiduciaries and discusses whether an investment in a fund of hedge funds is consistent with a fiduciary's duty to act personally.

Keywords: Hedge Funds, Alternative Investments, Prudent Investor Rule

JEL Classifications: G23, K22

Accepted Paper Series