Financial Times – London’s rapid emergence as a hedge fund capital to rival New York and Greenwich, Connecticut, owes much to the friendly approach the Financial Services Authority has adopted to this industry. Yesterday’s proposal from the FSA that it should allow funds-of-funds (which hold portfolios of hedge funds) to market their products to retail investors reinforces the UK’s position as a cutting-edge jurisdiction. It is also another landmark in the process by which hedge funds are moving into the mainstream of investment management globally.
The FSA, to a much greater extent than the US Securities and Exchange Commission, sees a role in helping the industry navigate this process. This strategy could help onshore funds reach a muchbigger pool of money while limiting scope for abuse. But the FSA must not neglect its focus on systemic risk and market manipulation.
The UK approach recognises that hedge funds are not – contrary to popular myth – necessarily high-risk products, though they are often complex and illiquid. Indeed, the notion of hedge funds as an asset class is itself misleading: they span a range of styles, markets and leverage structures. What they have in common is their objective: to generate absolute returns rather than match or beat an index.
It is not hard to see why many retail investors might want exposure to absolute return products. UK investors already have some access to funds, including ones from other European Union jurisdictions and can invest in shares of listed fund-of-fund managers. It seems reasonable to allow onshore funds to be sold to them.
