In an interesting twist on locking the stable door after the horse has bolted, the Financial Service...
In an interesting twist on locking the stable door after the horse has bolted, the Financial Services Authority seems to have decided to open another one instead.
It has published a new consultation paper aimed at speeding through the authorisation of “wider-range retail investment products” (that’s funds of hedge funds to you and me), just five years after its original discussion paper on authorising hedge funds.
In the time since the FSA began pondering the authorisation of hedge funds, the market has taken upon itself to meet the demand for such products.
But while the wheels of government often turn slowly, it is surely the nature of the debate that has caused the regulator to take so long. The Ucits III rules have allowed mainstream funds to adopt long/short equity strategies of the type once only available to hedge funds, and funds of funds under the non-Ucits retail scheme (Nurs) rules have been able to hold hedge funds offering a range of strategies.
The sun still rises each morning regardless.
The FSA is proposing to bring funds of alternative investment funds “into the existing well-regulated non-Ucits Retail Scheme (Nurs) regime”, and lift the 20% restriction on fund of funds’ investments into hedge funds.
In other words, “the investment industry is already offering such strategies, and it seems to be going OK, so we may as well let it carry on”. Let us put the horse back in its stable for a moment and switch our metaphorical attention to chickens and eggs.
The FSA has not authorised hedge fund investments before because hedge funds are scary things run by secretive gents in open-necked shirts from behind the Georgian facades of terraced houses in Mayfair. (Or worse, somewhere sunny and hence inherently decadent, such as the Cayman Islands.)
Hedge funds are scary things because people do not understand them. People do not understand them because they are not readily available. If they were readily available, they would lose their mystique and become part of the mainstream, arguably allowing the rank and file of private investors to build some diversification and downside protection into their portfolios.
If all this sounds uncannily like the arguments for downgrading cannabis from a class B to a class C drug, take note. We may be back here in a few years’ time beating ourselves up because newer, stronger strains of hedge fund are having effects that no-one had foreseen.
On the other hand, the apparent decision by the FSA to treat investors like grown-ups might turn out all right after all.