Attracting New Investors: TOFA’s Role

Attracting new investors is essential for the success of any fund. In the past, fund managers would often brush off questions about FX risk in relation to fund performance by stating that investors manage this risk themselves. However, recent trends have shown that this is no longer the case. Investors, particularly retirees, want the fund to manage the risk for them through a hedged class of units. This has created a new set of challenges for funds, including finding effective hedges and obtaining the Taxation of Financial Arrangements (TOFA) election.

Adopting TOFA may be necessary to remain competitive in the next few years. TOFA is a tax hedging election that reduces the volatility of timing differences caused by hedging with derivatives. Qualifying for hedge accounting and obtaining TOFA allows the designated hedges to be allocated to the capital account instead of the revenue account. Confirming eligibility for the TOFA hedging election is a strict and important process and can be time-consuming. Partnering with a tax advisor and hedge accounting expert can ensure the application is successful and minimize surprises.

Not hedging the fund’s performance from FX contracts exposes the fund with offshore assets to AUD appreciation. In addition, hedging with an FX forward contract creates unwanted volatility in income distribution to unitholders if the TOFA election is not obtained. Investors want as much reliability in returns as possible, making minimizing risk with TOFA important.

Implementing TOFA can seem overwhelming at first, but it is crucial for attracting new investors. Many businesses write off advisors as an expensive and unnecessary expense, however, working with an advisor will lead to less FX volatility, attracting more investors. Creating an internal team is just as important as reaching out to a third party, especially in the submission stage. Build a strong team of experts to support the submission and include a hedge accounting expert and tax partner with the proper experience.

In summary, having a fund, or at the very least, a hedged class of units that is TOFA compliant will increase your investor pool and the fund’s attractiveness for those looking for reliable returns. If you don’t appeal to the shifting demand of retirees, someone else will.

Contact us today and set up a consultation to go over what obtaining TOFA treatment looks like for your business.