FSA all-clear for retail investors to put money into hedge funds

The Financial Services Authority opened the door yesterday for private individuals to invest in hedge funds, scrapping rules which prevent regulated UK investment funds from investing more than 20 per cent of their portfolio in the asset class.

The move is likely to spark a wave of hedge fund launches, which will be easily accessible to the retail market.

Currently, the only simple way for UK retail investors to invest in hedge funds is via a handful of unregulated investment trusts. However, onshore regulated investment funds - such as Oeics and unit trusts - are limited to investing no more than 20 per cent of their portfolio into so-called unregulated alternative investments such as hedge funds.

Only the wealthiest private individuals can invest directly in hedge funds, as minimum investment levels are typically tens of thousands of pounds. Furthermore, individuals also require a special, sophisticated investor licence.

The FSA launched a consultation paper yesterday unveiling its new plans, with the new rules expected to come into effect towards the end of the year.

Dan Waters, the FSA's director of retail policy and asset management, said: "Asset management is a dynamic and innovative industry and we believe it is important that consumers can get access to the latest techniques to manage their own savings and investments.

"We think the time is right to permit access to a wider range of innovative strategies through authorised onshore vehicles. This will allow investors more choice and a better opportunity for risk diversification, while maintaining investor protection through our rules on the operation of the product."

The new rules will include a number of guidelines which fund managers investing in hedge funds will be expected to follow.

The fund management industry, which has been lobbying for a liberalisation of the rules for several years, welcomed yesterday's news. Pryesh Emrith, a hedge fund analyst at Charles Stanley, said: "The proposed new rules place a responsibility on the industry to educate investors about the products, and how they might be used as part of an investment portfolio. It is vitally important that the industry rises to this challenge. A lot of public concern about Funds of Alternative Investment Funds is fear of the unknown. If it is explained to potential investors how these funds are constructed and how they might use them, I believe a lot of their concerns will be allayed."

Nicola Horlick, a fund manager who now runs the investment boutique Bramdean, added her support to the changes.