industry news: The decision by the fsa not to allow any retail hedge funds gives continental europe a head start
The UK regulator's decision not to open up domestic retail hedge funds could seriously hamper the efforts of UK companies to enter the hedge fund market.
The Financial Services Authority's (FSA) decision, which effectively forbids short positions from being taken in individual stocks, could lead to an uneven playing field with UK managers losing out because of the way some European jurisdictions are likely to interpret the new Ucits provision according to Paul Dellar, head of product management for the UK retail division of DWS Investments.
They are expected to decide that certain types of market neutral hedge fund product can be put in a Ucits wrapper. The FSA's interpretation is currently not wide enough to allow this and the result is that UK managers could be at a disadvantage, according to Dellar.
While a Ucits fund registered in Luxembourg could easily be sold across Europe into jurisdictions that permitted it, UK market neutral products could not. In order for a UK manager to sell a retail hedge fund product across Europe they would first have to register it somewhere such as Luxembourg, which could be a difficult and costly task.
If European jurisdictions open up to retail hedge funds there is still a question about whether investors will be interested in them, especially given the bad publicity they often receive. Dellar believes that they will be interested, even if there is an initial period of scepticism.
'Right now retail investors are not used to hedge funds but looking forward, we are going to see returns muted compared to the 1980s and 1990s and there will be a shift from low risk long only to absolute return or high risk long only,' he said.
When the UK's FSA consulted the investment industry about retail hedge funds the majority were against opening up the market, which resulted in no changes regarding retail hedge funds.
This decision was swayed by two large groups with vested interests in preventing them, according to Dellar.
Managers who specialise in hedge funds did not want the market opened up to retail investors because it could lead to more mainstream managers entering the investment class and creating increased competition.
Mainstream long only managers similarly do not want retail hedge funds to develop because this could pose serious competition to their long only products.
Firms interested in opening the market to retail investors are the minority, said Dellar.
Dellar is in favour of retail hedge funds subject to conditions. 'Certain types of hedge fund, particularly market neutral long/short, are suitable with certain limitations,' he said.
'They are generally quite low risk. Also most retail investors hold a long only bias in their portfolios so market neutrality would give diversification.'
These conditions would include limits on gearing, diversification in the funds and a requirement that the nature of funds being clearly disclosed.
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