Currently, investment managers and distributors have to be authorised by the FSA in order to manage and market hedge funds, but the offshore funds themselves do not need to be authorised. Consequently, they have only been able to market these funds to professional investors. Under new proposals from the FSA outlined in its paper âFunds of Alternative Investment Funds (FAIFs)â, onshore authorised hedge funds and providers will therefore be able to market to retail investors. Such regulatory changes could have a wider impact on hedge fund investment as institutional investors and trustees who do not currently invest in offshore hedge funds, due to governance concerns, may be more comfortable investing in onshore regulated hedge funds, and they could also open the market for SIPP investors.
Mark Seaman, Principal Consultant at Etheios, commented: âWhilst it is acceptable for the industry to market to professional and sophisticated investors under the current relaxed regime, if the market is to become more mainstream, then greater regulatory oversight is required. These funds have to be regulated if their innovative investment approaches are to be offered to a broader range of investors â in a recent survey1, less than 20% of affluent investors claimed to understand hedge funds. The changes will allow financial institutions to offer these funds and we at Etheios are ready to assist in their developmentâ.
Joseph Bachman, Business Development Manager - Hedge Funds/Derivatives Practice, adds, âThese funds offer the potential for an absolute return regardless of the state of the market, which can add diversification to retail investorsâ portfolios. This presents challenges to the traditional FoHF provider to gear up their products to make them attractive for the retail market.â
Etheios is working on a research project into the future of the fund of hedge fund industry and the impact of the likely regulatory changes. HFIM, which is an Investment Manager to an Irish domiciled fund of hedge funds, will be assisting Etheios in some of its analysis.
Tushar Patel, Managing Director of FSA regulated HFIM, commented: âThe fund of hedge funds world is evolving and the recent draft proposals by the FSA will have a wider implication. We expect more fund of hedge funds structures to be established onshore where there is greater regulatory oversight and reporting requirements, leading to convergence with some of the regulatory standards imposed on authorised mutual funds as mainstream investors access these funds. This may also increase institutional investorsâ preference for fund structures to be onshore and in a more regulated environment. The fund of hedge funds managed by HFIM is domiciled in Ireland and as such it appeals to investors who require the fund to be established within an EU jurisdiction, where there is greater regulatory oversightâ.