There is real disappointment among managers at the FSA's decision not to authorise open-ended retail funds of hedge funds
The UK Financial Services Authority's (FSA) decision not to relax rules governing the marketing of hedge funds to retail investors has been met with a mixed reaction from the industry.
While most parties were positive about the FSA's commitment to continued dialogue and agreed with its decision that hedge funds should not be marketed directly to the retail market, there was disappointment that the FSA did not choose to authorise open-ended retail funds of hedge funds.
The FSA consultation period began six months ago with the publication of DP16, a discussion paper on the marketing and selling of hedge funds to retail investors, the regulation of hedge fund managers and financial crime issues.
Around 40 respondents commented on whether the rules governing the marketing of hedge funds to retail customers should be relaxed, and whether the supervisory regime for hedge fund managers should be changed.
Under the existing regime, hedge fund products may not be marketed and sold to retail investors except in certain circumstances, for example, some financial advisers are authorised to recommend hedge fund products. Individuals who invest in hedge funds tend to be higher net worth individuals.
Commenting on the feedback received during consultation, Gay Huey Evans, director of markets and exchanges said: 'Generally, the feedback we received did not indicate a great desire on the part of hedge funds or investment advisers to provide or sell hedge funds as retail products. Nor was there evidence of significant demand from retail investors.'
Aima welcomed the FSA's decision. Christopher Fawcett, chairman of Aima and its elected UK council member, said: 'In particular, we welcome the statement that the current regulatory regime for hedge fund managers in the UK is generally appropriate so that no change to the supervisory regime is called for.'
However, in a statement Aima did say it believed UK investors should be able to access well structured and diversified funds of hedge funds products and acknowledged the FSA's willingness to keep under review the possibility of bringing some currently unregulated schemes within the UK authorisation regime.
Matrix Money Management, a hedge fund provider to the UK retail market which specialises in a range of funds of hedge funds for smaller private investors, said it had not seen demand for the current marketing rules to be changed, but had found demand for clarification of the current regulatory regime for UK financial advisers.
Bridget Cleverly, a director of Matrix said, 'In chapter four of the response to the consultation document on the marketing of hedge funds, the FSA confirms the present regime does allow for hedge funds to be marketed and sold to retail investors, although in limited circumstances. They confirm that appropriately authorised intermediaries are able to recommend hedge fund products to retail customers for whom they are considered suitable. We believe that this is the best route for our funds of hedge funds to be recommended to retail investors and our marketing strategy for the last two years has been focused on providing suitable training and product information for a growing number of financial advisers.'
John Chatfield Roberts, a money manager from Jupiter Asset Management, said he agreed hedge funds should not be marketed directly to the retail public and welcomed continued dialogue with the industry, but said he was disappointed the FSA had not seen fit to authorise open-ended retail funds of hedge funds.
'We think that although, as they correctly said, there does not appear to be much demand at the moment, if we manage to educate and market to investors it seems reasonable to us that demand will increase substantially,' he said.
He was also critical of the investment trust route to hedge fund marketing, which he said largely defeated the purpose of hedge fund investment by generally trading at a discount.
And he questioned why hedge funds are still viewed as risky despite good performance.
'It is ironic that somebody could buy an authorised technology fund three years ago and lose 85% perhaps to date, whereas if they had bought a bad fund of funds they might have lost 10% or 15% if they were unlucky. If it was a good one it would have probably made 10% to 15% in one of the worst bear markets we have had for 100 years,' he said.
In discussion paper 16, the FSA suggested two particular ways of bringing hedge funds to the retail market, using either the regime for listed investment companies or collective investment schemes.
However, neither regime can currently accommodate single manager hedge funds as they require a spread of risk in a manner that such portfolios are unable to provide.
Before hedge funds can use the authorised collective investment scheme regime, many of the rules will need serious amendment, according to the regulator, including those on performance fees, disclosure, and borrowing and investment restrictions.
A small number of respondents said funds of hedge funds would be appropriate retail investments, but the FSA echoed its argument that including hedge funds in any form within the existing collective investment regime would significantly change the nature of the regime and reduce the significant protection it offers.
The FSA also published discussion paper 17 on short selling last October and is expected to produce further feedback on that particular practice in late Spring.
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