German financial regulator BaFIN has emphasised the need for security in new guidelines on pension funds and insurance companies’ investment in hedge funds.
BaFIN recommends that safety should be the “highest priority”. One of the essential requirements to handle hedge funds is that only insurance firms or institutions which can prove they can face the risks, as suggested by circular R 29/2002, should deal with hedge funds.
The economic and legal risks of investments in hedge funds must be comprehensively analysed “before purchase and again during investment phase”. BaFIN also requires that, independently of the investment, the loss of the investor is limited to the value of the commitment and there should be no liability to pay any additional amount.
BaFIN has set six general rules on information and disclosure for direct and indirect hedge fund investments, including information on organization, management, investment policy and risk management.

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