UK to Allow Retail Investment in Hedge Funds

The UK Financial Services Authority proposes to allow retail consumers to invest in funds of hedge funds and other alternative investments. UK retail investors are already able to get exposure to hedge funds and other alternative products in a variety of ways, including structured products. The FSA believes now is the right time to allow the development of retail-oriented funds of alternative investment funds (FAIFs) within its regulatory regime. This proposed expansion of retail investment would involve substantial structural and operational safeguards, including requiring independent depositaries, timely redemptions, and strict rules on the independent valuation of underlying assets.

A key element in the proposed regime is the expectation that the fund manager will operate with due diligence. In this context, the FSA proposed guidance for the fund managers to consider in making, and maintaining, significant investments in unregulated schemes. The FSA has also accompanied the proposal with a case study illustrating the respective responsibilities of providers and distributors of these products.

According to FSA Director Dan Waters, it is important for consumers to gain access to the innovative alternative investment products as they manage their own savings and investments. The proposal allows investors more choice and a better opportunity for risk diversification, he emphasized, while maintaining investor protection through FSA rules on the operation of the products.