The Alternative Investment Management Association (AIMA) – the global hedge fund and alternative investment industry association – has today welcomed the Financial Service Authority’s (“FSA”) recommendation to allow UK retail investors to invest in funds of hedge funds.

The FSA has today issued two separate Feedback Statements on its previous discussion papers looking at hedge fund investing in the UK – DP05/3, “Wider-range Retail Investment Products” and DP05/4 “Hedge funds: A discussion of risk and regulatory engagement”. In its discussion paper on retail investment products, the FSA has concluded that funds of hedge funds are appropriate financial investments for the UK retail investment market.

Funds of hedge funds invest in single manager hedge funds. One of AIMA’s primary goals is to educate the investment market on hedge funds. In this instance AIMA agrees with the FSA that fund of hedge fund managers are best qualified to select the most appropriate hedge funds for retail investors.

Florence Lombard, Executive Director at AIMA commented: “There is a common will shared by the industry and the FSA to optimise the investment environment for investors. The FSA has correctly concluded that retail investors should be given the opportunity to invest in market leading investment products that can deliver absolute return performance in all markets.”

Over the last number of years hedge funds have become increasingly mainstream with institutional strength controls and governance. AIMA has been encouraging the distribution of funds of hedge funds since the FSA’s original DP16 hedge fund discussion paper in 2002. These funds are already marketed to retail investors in other European countries including France, Germany, Italy and Spain.

AIMA has also welcomed the FSA’s statement in its discussion paper on risk and regulatory engagement – DP05/4 – that hedge funds enhance market efficiency, increase liquidity, and that the FSA is committed to ensuring the UK remains an attractive place for hedge fund managers. The number of hedge funds managed in London has more than doubled between 2002 and 2005 and now represent 20% of the worldwide industry.

AIMA is happy that the FSA’s Feedback Statement (FS 06/2) states that it will continue to authorise hedge fund managers in the same way as it does all other investment managers. This is firmly in line with AIMA’s view. It also addresses a few industry issues that AIMA and the industry have been looking at for some time, most notably asset valuation, the need for sound practices and the use of ‘side letters’.

AIMA is pleased that the FSA is leading coordination of IOSCO’s work on asset pricing for the hedge fund industry, to create principles-based guidelines. The FSA refers to a specific company that has withdrawn from the industry following fund over-valuation – not a member of AIMA. The FSA states that it will “look to build on the work on good practice that has already been undertaken through trade bodies such as AIMA”.

This refers to AIMA’s ‘Asset Pricing and Fund Valuation Practices in the Hedge Fund Industry’ April 2005 study, which puts forward 20 recommendations covering governance, transparency, procedures and pricing models. The second phase of work in this area is already underway and AIMA has recently established a global working group comprising hedge fund managers, administrators, investors and leading pricing specialists.

In its paper, the FSA emphasizes the need for enhanced sound practices and, indeed, references the groundwork, which AIMA has already undertaken in this key area.