EU Mutual Funds Push for Access to Hedge-Fund Indexes (Update2)

Date: Tuesday, April 3, 2007
Author: John Rega, Bloomberg

April 2 (Bloomberg) -- European mutual funds may be able to give ordinary investors a taste of hedge-fund returns, if their managers convince regulators to let them buy derivatives of hedge-fund indexes.

Mutual funds should be allowed to bet on the performance of hedge funds just as they can for other financial indicators such as stock indexes, industry groups argued today at a hearing in Paris of the Committee of European Securities Regulators, which disallowed such investments last year.

A change would let European Union-regulated funds put some of their 5.5 trillion euros ($7 trillion) of assets into derivatives tracking hedge-fund portfolios by next year. Allowing indexes would open another avenue for regular people to share in the gains of the funds limited to the wealthy and institutions.

``These are a class of assets that retail investors could benefit from,'' said Stephane Kuzmin, responsible for regulatory matters for index-linked funds at Barclays Global Investors Ltd., the hedge-fund arm of Barclays Plc, at the hearing. ``We'd welcome to have some hedge-fund indices available.''

Unregulated Pools

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, and participate substantially in the profits earned for wealthy people and institutional investors such as pension funds and insurers.

The regulators' group, CESR, tentatively backed the right for EU-registered funds to buy derivatives that rise or fall in step with hedge-fund indexes on Feb. 6. The consortium suggested in a policy paper that clearly defined indexes, which publish how they measure performance and are audited annually, may now be suitable.

Investor groups at the hearing criticized the idea of an audit rule or any other requirement apart from those mandated for stock-market indicators or other eligible measures.

``We should really treat equally hedge-fund indices as opposed to other indices,'' said Oliver Schupp, president of Credit Suisse/Tremont Hedge Index.

Opponents countered that index-derivative investing shouldn't be permitted while the EU-authorized funds -- which get a ``passport'' for sale around the region -- can't buy into funds of hedge funds, which have the advantage of being actively managed.

Retail Market

``I don't see where the protection of the retail market or investors is achieved by giving the passport to the fund index,'' said Gilles du Fretay, president of HDF Finance SA, a provider of funds of funds in Paris.

CESR, which doesn't make binding rules on its own, will issue recommendations to national authorities within a few months, said Dan Waters, director of retail policy at the U.K. Financial Services Authority and chairman of the hearing. The guidelines would then take effect in July 2008 as part of a package of other new investment rights coming into force for EU funds.

The European Commission, the EU executive agency in Brussels, may consider broadening those rights to permit buying of funds of hedge funds when it considers future rule revisions, Waters said.

European countries including Germany, Spain and the U.K. have permitted limited investment in funds of hedge funds or other means of investing in the vehicles traditionally restricted to institutional investors or people with $1 million or more.

Hedge funds' flexibility in pursuit of higher returns -- which includes the rights to buy any type of asset and borrow money -- has drawn an ever larger pool of capital, reaching $2 trillion at the end of last year, according to a survey published March 29.

To contact the reporter on this story: John Rega in Brussels at jrega@bloomberg.net .