The Financial Regulatory Authority (FRA) has issued the first regulatory framework governing the establishment and operation of hedge funds in Egypt, marking a significant step in expanding the country’s capital market and broadening investment opportunities.
Under a decision issued by the FRA’s Board of Directors, chaired by Islam Azzam, hedge funds will be permitted to invest in equities, debt instruments, financial derivatives, including futures and exchange-traded options, securities borrowed for short selling on the Egyptian Exchange, and other highly traded securities and financial instruments.
The FRA will license hedge funds in accordance with the investment limits and rules set out in their prospectuses or information memoranda and approved by the regulator. Existing investment funds will also be permitted to undertake hedge fund activities under specified conditions, in line with Capital Market Law No. 95 of 1992 and its executive regulations.
Azzam said allowing hedge funds to operate follows recent amendments to the executive regulations of the Capital Market Law and is expected to support ongoing efforts to broaden and deepen the Egyptian capital market.
He added that hedge funds would provide investment funds with greater operational and investment flexibility while helping to stimulate the derivatives market.
According to Azzam, hedge funds could also attract new segments of local and foreign investors by adopting diversified investment strategies aimed at generating higher returns. He noted, however, that such strategies require highly experienced investment managers capable of responding to changing market conditions, prompting the FRA to establish detailed obligations for fund managers to protect investors and ensure sound investment decisions.
The new regulations require each fund’s investment policy to specify its permitted leverage limits and the methodology used to calculate leverage. Funds must also disclose potential risks, including amplified losses, liquidity risks, margin calls, forced liquidation, and market volatility, as well as explain the procedures investment managers will use to manage those risks.
Investment managers will also be required to provide regular disclosures to both the FRA and investors on leverage levels, stress-test results following material market changes, breaches of investment or risk limits and the corrective measures taken, as well as any material changes to investment strategies.
Under the new framework, applicants may either establish a new hedge fund or apply to convert an existing investment fund into a multi-issuance fund investing in securities and financial instruments listed on the Egyptian Exchange, with the option of using specialised investment strategies and trading mechanisms approved and regulated by the FRA.
Existing investment funds wishing to undertake hedge fund activities must obtain board approval to amend their prospectus or information memorandum and update the relevant documentation to reflect the change in the fund’s nature.
Eligible investments may include securities and financial instruments listed on Egyptian exchanges, units of open-ended or exchange-listed investment funds, futures and exchange-traded options, and other financial instruments approved by the FRA’s Board.
The prospectus or information memorandum must clearly define the fund’s investment policy and the eligibility criteria for target investors, while subscription and marketing entities will be responsible for verifying that clients meet those requirements.
It must also set out the investment manager’s risk limits and risk management framework, covering leverage, counterparty exposure—particularly in securities lending, securities borrowing, and derivatives transactions—liquidity and concentration limits, stress testing, stop-loss mechanisms, derivatives risks, and risks associated with securities lending and borrowing.
In addition, the documents must explain the methodology used to evaluate the fund’s performance, including risk-adjusted return measures and relevant benchmarks, together with the investment manager’s obligations and any additional disclosures required by the FRA.
The fund’s investment policy must also specify its targeted asset classes, the minimum and maximum allocation limits for each asset category, the investment strategies to be employed, and the objectives and risks associated with each strategy.
It must further explain how specialised trading mechanisms, including derivatives, short selling through borrowed securities, and margin trading, will be used, alongside permitted leverage and borrowing limits, liquidity management policies, redemption procedures, and the circumstances under which redemptions may be suspended or postponed.
The decision also establishes detailed eligibility requirements for investment managers, including specialised expertise in hedge fund investment strategies and the technical infrastructure needed to manage such funds.
Investment managers will be required to periodically assess counterparties’ creditworthiness, monitor leverage to ensure compliance with disclosed limits, conduct regular stress tests and scenario analyses to evaluate the fund’s resilience under adverse market conditions, and verify the adequacy of collateral associated with transactions.
