Israeli Finance Committee Approves Hedge Fund Trust Law Update to Secure Growing Investment Channel

The Finance Committee of the Israeli Knesset, chaired by MK Hanoch Milvitsky, has approved an update and expansion of the law regulating hedge funds in trust, a rapidly growing investment channel. The amendment is expected to be brought for second and third readings in the Knesset plenary this week, removing the legal uncertainty that threatened the launch of new funds and possibly the continuation of existing ones.

Hedge funds in trust, launched in April 2023 and currently managing about 6 billion shekels, operate under a temporary extension pending permanent legislation. This investment vehicle has gained popularity by allowing public investors to access hedge fund-like strategies with minimal investments of a few hundred shekels, compared to traditional hedge funds requiring tens or hundreds of thousands of dollars. The sector is regulated by the Israel Securities Authority and maintains transparency by publicly reporting investment portfolio structures.

Currently, 46 hedge funds in trust operate on the Tel Aviv Stock Exchange, modeled after traditional hedge funds that serve high-net-worth individuals and institutional investors. Despite rapid growth, these funds still represent less than 1% of Israel's mutual fund industry, which manages over 830 billion shekels. The new law will also enable fund managers to offer additional types of mutual funds, such as infrastructure and credit funds, under a private investment framework.

The funds charge high management fees similar to traditional hedge funds, including 1.5% to 2% of assets plus 20% of profits. These fees support generous commissions to insurance agents and financial marketers, fueling the sector's rapid expansion. A key advantage is the tax deferral benefit, as capital gains tax applies only upon redemption, unlike private hedge funds where investors pay annual taxes regardless of sales.

Performance-wise, many hedge funds in trust have shown strong returns over three years, averaging 128% gross, though slightly underperforming the TA-125 index's 135% rise. Some experts note that these funds often lack true hedging elements, with portfolios heavily exposed to equities and beta risk, leading to amplified gains and losses. Previously, Bank of Israel officials expressed concerns that the sector's fast growth could pose liquidity risks and threaten financial stability if mass redemptions occur.

The legislative update aims to solidify the regulatory framework, ensuring the continued development of this investment channel while addressing prior legal and systemic concerns.