With the solemn publication of Consultation Paper 07/06: Funds of Alternative Investment Funds (FAIFs) 232kb, 48 pages, London’s financial watchdog is finally paving the way for retail investors in Britain to place their money in hedge funds.
Not any old hedge fund, mind. The Financial Services Authority first wants substantial structural and operational safeguards to be in place, including a requirement to have an independent depositary, strict rules on independent valuation of underlying assets and timely redemption of investment.
Also, managers of FAIFs taking money from the great unwashed will get guidance from the FSA on what due diligence steps the managers should take when making significant investments in underlying, unregulated funds or investment schemes.
And, just in case anyone gets the wrong idea, the FSA was at pains on Tuesday to make it clear that the regulator is NOT introducing a new type of retail investment product called Funds of Alternative Investment Funds — even if it does use the FAIFs acronym 81 times in CP07/06. No! These will be “Non-UCITS Retail Schemes (NURSs), a category of scheme that already exists in our rules,” the FSA says.
“NURSs are allowed to be widely marketed to retail consumers in the UK,” the regulator adds. “The term FAIF denotes a NURS that invests more than 20 per cent of its scheme property into unregulated collective investment schemes.”
UCITS schemes, of course, are regulated under an EU directive, so these types of schemes (unlike NURSs) can be sold across Europe under the EU’s “passport” system for financial products.
Confused? Well, the FSA just seems to be using a loophole that allows it to keep retail fund of hedge funds tightly under its control in the UK. Otherwise some of its continental regulatory cousins would probably kick up a stink.
But don’t take our word for it. Read the whole document, including a handy little case study of what might happen in a world where the hapless suddenly find themselves in a hedge fund.
Extract:
“The issue is…that the range of investment outcomes and liquidity of some FAIFs could be something of a novelty for some consumers (and even for some financial advisers)….”
If you’re feeling really motivated, read the previous discussion paper on the matter: Wider Range of Retail Investment Products; consumer protection in a rapidly changing world, read an earlier briefing note entitled Hedge funds: a discussion of risk and regulatory engagement, and then read the feedback.
Alternatively, just sit back and wait for the draft rules, policy statement and accompanying timetable. They should be out sometime towards the end of the year.