UK Regulator Set To Relax Hedge Fund Selling Rules

by Robert Lee, for LawandTax-News.com, London

15 June 2005

The United Kingdom's financial market regulator, the Financial Services Authority, is set to launch two discussion papers which aim to spark debate on the merits of allowing hedge funds to sell their services to retail investors based in the UK.

While the FSA has stated that the discussion papers, the first of which is due within the next month, will not make any specific proposals for new regulations allowing hedge funds to be sold to smaller investors, the regulator has decided to revisit the issue in the light of the industry's phenomenal growth, and in acknowledgment of the fact that regulators around the world are also relaxing hedge fund selling rules.

In 2003, the FSA ruled that hedge funds would not be permitted to sell to retail investors because the risks would outweigh the benefits of such a move, and it considered that there was insufficient demand for complex hedge fund products at the retail end of the market.

However, hedge fund assets under management globally have since doubled to more than $1 trillion, as high-net-worth individuals and institutions were attracted by returns that achieved double-digits at a time when the equity markets were slumping. Consequently, the investment class has moved from the alternative into the mainstream, and fund managers in London are reporting pent-up demand for hedge funds. They also warn of increased competition from other jurisdictions, notably Ireland and Germany.

London is by far the largest hedge fund centre in Europe and is second only to New York in terms of assets under management. A recent report by International Financial Services London (IFSL) calculated that the city controls one-fifth of global hedge fund assets.

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