The Financial Services Authority yesterday cleared the way for widespread retail investment in hedge funds, saying it wanted to bring Funds of Alternative Investment Funds (Faifs) into its regulatory remit later this year.
Currently, the only simple way for British retail investors to put money into hedge funds is via a handful of investment trusts not authorised by the FSA. However, onshore regulated investment funds – such as Open-Ended Investment Companies (OEICs) and unit trusts – are limited to investing no more than 20 per cent of their portfolio in unregulated alternative investments.
Only the wealthiest private individuals can sign up directly for hedge funds because the minimum investment typically runs to tens of thousands of pounds. They also require a sophisticated investor licence to do so. Under the FSA's proposed new rules, published yesterday, OEICs and unit trusts would be able to invest an unlimited proportion of their portfolio into unregulated alternative investments, subject to a commitment to carry out greater due diligence on those investments.
Dan Waters, the FSA's director of retail policy, said: "Permitting consumers access to a wider range of innovative investment strategies through authorised onshore vehicles will allow more choice and a better opportunity for risk diversification, while maintaining consumer protection through our proportionate rules on the operation of the product."
The FSA started discussions about opening up the hedge-fund market to retail investors last March and it had hoped to have new rules in place by the end of 2007. Publishing its consultation paper yesterday, it said there were still complex tax issues raised by fund managers and other details to be ironed out before it finalises the new regulations.
Mr Waters added: "We aim to make the final adjustments to the new regime before the end of the year, including the additional areas on which we are consulting today. Following constructive discussions with the Treasury on tax issues, we welcome the publication of their tax framework, setting out a new elective regime which aims to allow Faifs to operate competitively within the UK retail market."
Hedge fund managers, who have lobbied for liberalisation of the rules for years, welcomed the proposals. Julie Patterson, of the Investment Management Association, said: "They are good news for product innovation and investor choice and are therefore good news for the UK's position as a serious fund domicile.
"We shall continue to work closely with the FSA, the Treasury and our member firms to ensure these changes are implemented as swiftly as possible."Reuse content