Private investors could soon have the chance to invest in UK-based hedge funds under proposals being considered by the Financial Services Authority (FSA).
The City watchdog is planning to launch a consultation on whether to increase the scope of the funds it authorises to include "funds of hedge funds".
If the outcome of consultation is positive, retail investors could be able to invest in hedge fund products from the second half of 2007.
Hedge Funds are complex investment schemes that differentiate themselves from traditional products such as mutual funds by having a broader scope to make investment decisions. They are able to short sell the market and take exposure in excess of their actual assets under management.
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A hedge fund's stated aim is to provide "absolute returns" irrespective of the direction of the overall market.
Under the proposals being considered by the FSA, individuals would be able to invest in authorised retail funds that distribute their holdings among a series of different hedge funds.
Managers of these "funds of hedge funds" will not be able to invest in all hedge funds because the FSA plans to impose a number of restrictions including liquidity criteria and the requirement to have an independent depositary.
Since the dot.com crash of 2000, pension funds and other institutional investors have used funds of hedge funds as a way to diversify risks away from traditional assets such as stocks.
Article date: May 2006
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