industry criticism shrugged off by german government
Germany's Ministry of Finance has defended reporting obligations on fund of hedge funds managers from the recent Investment Modinisation Act 2004 as hedge fund managers have questioned whether the reporting could effectively exclude the best underlying managers from German investors.
Joerg Vollbrecht, deputy head for the ministry's unit for investment issues, told attendees at the Frankfurt Hedge World Germany 2004 conference in late May, reminders of LTCM's 1998 collapse partially informed the Ministry's decision on reporting and risk warnings for retail fund of hedge funds investors.
"With the experiences with LTCM's failure in mind there is this bad image of hedge funds we have to take into account. We decided - at least at the beginning - the retail market should be given a warning to show private investors this is something different to a normal investment fund they are used to."
Andreas Benz, regional manager with Man Investments, said it was "very sensible" to have the new rules implemented, "and the good providers will be strengthened in their marketing possibilities in Germany." Domestic German funds of hedge funds must come with risk warnings. The investor should be prepared for losses of up to their total investment. Funds of hedge funds can be sold to retail without minimum investments while single funds can only be distributed via private placement.
Domestic German funds of hedge funds must come with the risk warning that the investor must be able to accept losses up to the total value of their investment. While the investment law only allows single hedge funds to be sold via private placements, funds of hedge funds have no such restrictions and can be marketed publicly and have no minimum investment imposed.
"There will be interest in funds of hedge funds and we expect there is interest in the retail market from private investors who will want to buy single hedge funds, so we think it is good to have the risk warnings in our law," Benz said.
Vollbrecht said the "experiences with the declining share market and good experiences with positive returns of alternative investments" were key reasons behind Germany implementing the new directives of Ucits and also of moving to allow regulated hedge funds onshore. Foreign funds of hedge funds may be marketed in Germany and regulators that can co-operate with German supervisors.
Distribution of a non-regulated fund of hedge funds is permitted in Germany but must be executed by a registered sales agent - effectively a German bank or financial institution with links to a German institution. But fund of hedge funds managers have complained the reporting requirements on German funds of hedge funds are too strenuous to attract the best underlying managers.
Underlying funds must submit to the fund of hedge funds investor information on their investment policy, extent of leverage and short sales and submit risk ratios and confirmed NAV.
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