الهيئة العامة للرقابة المالية

• The resolution establishes regulatory rules for launching new hedge funds and enables existing investment funds to enter the sector.
• Defining investment manager duties, essential prospectus elements and investment policy standards.

Dr. Islam Azzam, FRA Chairman:

• Hedge funds will activate the stock market alongside the rollout of derivatives and short selling.
• They offer greater flexibility through diversified tools, unlocking access to new local and global investor segments.
• This resolution strikes a balance between investor protection and sound investment decisions.

 FRA Board of Directors chaired by Dr. Islam Azzam, has issued a landmark resolution regulating—for the first time—the establishment of hedge funds.

The new framework permits hedge funds to invest in equities, debt instruments, derivatives (such as futures and traded options), borrowed securities for short selling on the Egyptian Exchange (EGX) and other high-liquidity financial instruments.

Under the new resolution, FRA will license hedge funds in accordance with the investment limits and guidelines specified in their prospectuses or information memorandums, subject to FRA approval. It also allows existing investment funds to operate as hedge funds under designated controls, pursuant to Capital Market Law No. 95 of 1992 and its Executive Regulations.

Dr. Islam Azzam, FRA Chairman stated that opening the door to hedge fund creation—and enabling existing funds to engage in hedge fund strategies—marks a crucial milestone following recent amendments to the Capital Market Law’s Executive Regulations. He highlighted that this move will yield wide-ranging benefits alongside ongoing EGX developments aimed at expanding and deepening the market, as hedge funds enhance operational and investment flexibility while boosting activity in derivatives market.

Dr. Islam Azzam noted that hedge funds are uniquely positioned to attract new domestic and foreign investors through diversified, return-maximizing strategies. Because these strategies demand specialized expertise to navigate shifting market conditions, FRA resolution explicitly outlines fund managers’ obligations—striking a balance between investor protection and sound investment decision-making.

He emphasized that the resolution strikes a crucial balance between investment diversification and unitholder protection. It mandates that a fund’s investment policy explicitly outline key parameters, including permissible financial leverage limits and calculation methodologies. Funds must also disclose potential risks—such as amplified losses, liquidity constraints, margin calls, forced liquidations and market volatility—alongside the risk management policies and procedures implemented by the investment manager.

FRA Chairman stressed that investment managers must provide periodic disclosures to both the Authority and unitholders regarding specific metrics outlined in the resolution. These include leverage levels, stress testing results following material market shifts, any breaches of investment or risk thresholds along with executed corrective actions, and all material changes to investment strategies—ensuring full transparency and safeguarding investor rights.

The licensing procedure begins either by submitting an application to establish a new hedge fund or by an existing investment fund applying to convert its status into a “multi-issuance fund” (umbrella fund) dedicated to investing in listed securities and financial instruments, with authorization to employ specialized trading mechanisms and investment strategies approved and regulated by the FRA.

The resolution requires any investment fund company seeking to engage in hedge fund operations to submit proof of board approval for modifying its prospectus or information memorandum. The updated prospectus must reflect the fund’s structural change and specify an asset allocation consisting of listed securities and instruments on Egyptian exchanges, units of open-ended or exchange-listed funds, exchange-traded futures and options contracts, or any other financial instruments approved by the FRA Board of Directors.

Regarding the prospectus or information memorandum, the resolution mandates several key inclusions beyond the baseline requirements of the Capital Market Law’s Executive Regulations. Specifically, it must detail the fund’s investment policy, target investor eligibility, and verification protocols for placement agents. Furthermore, it requires a comprehensive risk management framework outlining leverage caps, liquidity limits, stop-loss mechanisms, stress testing, and counterparty exposure controls—particularly across derivatives and securities lending or borrowing activities.

Furthermore, the prospectus or information memorandum must include: the methodology for evaluating fund performance—including risk-adjusted return indicators and benchmarks for performance comparison—the obligations of the investment manager and any additional disclosures required by the Authority.

As a core element of the prospectus or information memorandum, the fund’s investment policy must clearly outline key operational parameters. At a minimum, this includes target sectors, asset allocation limits, and the manager’s primary investment strategies and risk profiles. Additionally, it must define protocols for specialized trading tools—such as derivatives, short selling and margin trading—alongside financial leverage limits, borrowing caps, liquidity policies and redemption terms, including deferral or suspension triggers.

The resolution outlines key obligations for investment managers, requiring specialized hedge fund expertise and robust technical infrastructure to execute fund strategies. Managers must periodically assess counterparty credit risk, monitor leverage within prospectus caps and maintain collateral adequacy across all transactions. Additionally, they are mandated to perform regular stress testing and scenario analyses to assess resilience during extreme market volatility and ensure collateral adequacy across all executed transactions—without prejudice to their statutory duties under the Executive Regulations of the Capital Market Law.

The resolution will be published in Al-Waqa’i’ Al-Misriyya and on FRA’s official website in the coming days, taking effect the day following its publication