Prepare for the entrance of the small but keen player in the guise of the retail investor who is on the cusp of being granted the key to hedge fund investment – admittedly in the form of a fund of funds structure.

 Particular questions meanwhile need to be asked, and answered – even as the widows and orphans aspire to achieve those elusive Alpha returns.

Such as, can a few tax tweaks from the Treasury prove enough to help ensure the success of these alternatives, and just exactly where are all these specialist advisors going to come from to protect and inform the investor?

By Ingrid Smith

Friday February 22, 2008

The Financial Services Authority today said it is set to introduce retail-oriented Funds of Alternative Investment Funds (Faifs) in the UK, following discussions with the treasury.

In a new consultation paper published today, the watchdog said it is progressing with policy which will enable it to introduce retail-oriented Faifs in the UK.

In November, 2007, the FSA stated there were a number of difficult tax issues involved in the operation of the onshore Faifs regime.

However, Dan Waters, FSA director of retail policy and themes and asset management sector leader, said: ‘Following constructive discussions with the treasury on tax issues we welcome the publication today of their tax framework, setting out a new elective regime which aims to allow Faifs to operate competitively within the UK retail market.’

The government will today publish a tax framework which will deliver a new tax regime for authorised investment funds (Aifs) investing in certain offshore funds.

It will also publish draft regulations for consultation in Spring 2008, which will deliver this tax framework.

The FSA said it has also initiated a further round of consultation on a number of important issues raised by fund managers and other interested parties – and which require resolution before the final regime is introduced.

The regulator released its first consultation paper on Faifs in March, 2007, and was due to report on it at the end of the year before the tax concerns arose.

Waters said: ‘Permitting consumers access to a wider range of innovative investment strategies through authorised onshore vehicles will allow more choice and a better opportunity for risk diversification.’

He added this can be achieved while maintaining consumer protection through the FSA’s proportionate rules on the operation of the product.

‘We aim to make the final adjustments to the new regime before the end of the year, including the additional areas on which we are consulting today’, Waters said.

The FSA also said, to avoid any regulatory regime being used to gain unintended tax advantages, it proposes to include a ‘genuine diversity of ownership’ condition in its rules.

This condition is similar to those proposed in the Property Authorised Investment Funds discussion paper issued by the Treasury in December, 2007.

The new consultation will close on May 22, 2008. The FSA will then finalise the draft rules in light of responses and publish a Policy Statement giving feedback towards the end of the year.

This will set out the finalised rules for Faifs as a whole and the date on which they will come into effect. 


The UCITS European directive would seem to offer innovation for investors, if only the European Monetary Commission could make the process simpler and cheaper for busy managers and smaller firms with promise.  For now it continues to be  a case of  ’seeking out the expertise of the advisor’ and waiting to see whether that elusive European full cross-border passport will ever emerge.   

Meanwhile financial services providers like Carne group are posed to take up the slack.

By Ingrid Smith 

Wednesday February 27, 2008

Hedge funds have been slow to adopt a UCITS III operational structure compared to more traditional and institutional funds as they baulk at the cost and regulatory requirements, according to Aymeric LeChartier from Carne Global Financial Services Group.

The head of business development at the advisor to European hedge and traditional fund managers told Thomson Investment Management News that the costs involved in implementing the European directive have made it a more difficult step for small boutique houses.

But even the larger hedge funds have chosen to retain their Cayman Island management structure because of the same issues around UCITS III, LeChartier said.

‘The hedge fund world is still a bit reluctant about heavy regulation,’ he added. And, he said: ‘If you’re talking about putting together a UCITS from A-Z for a client it will be almost double the cost of a Cayman fund.’

He argues that, although ‘there’s not a major uptake by hedge funds… (UCITS III) is something that should definitely reshape the industry going forward… the innovative firms have entered that space.’

LeChartier’s comments came as his firm launched a service aimed at ’smoothing the sometimes rocky path’ towards UCITS III authorisation.

The UCITS project aims to allow the marketing of investment funds across the EU, provided the fund and fund managers are registered within an EU member state. The European Commission will publish its draft UCITS directive in the next few weeks amid reported concerns that it may opt not to support the introduction of a full management company passport.

UCITS III also incorporates a so-called product directive which opens up – and regulates – investments in a wider range of financial instruments, including money market, derivatives, index tracking and funds-of-funds.

UCITS funds comprise more than 75 pct of the European fund market, yet according to the EU Commission’s White Paper from the end of 2006, only a relatively small proportion of those are offered cross-border.

Despite the problems highlighted by LeChartier in relation to hedge funds, he argues that the take-up will eventually increase, led by institutions and maturer funds.

LeChartier believes that something approaching a ‘revolution’ is at hand, initiated by the older and larger investment houses with better operational structures in place. They see the heavily regulated directive as a safer ‘alternatives’ bet for ‘the more conservative part of their money.’

He argues these houses will be happier to allocate to alternatives because of reassuring restrictions imposed by UCITS – such as a limited leverage ability and the requirement to have liquid positions.

‘All these restrictions give reinsurance for the fund managers to allocate some of their more conservative portions to a UCITS 130/30… that’s the revolution.’

‘The fact that you can offer an alternative strategy for a more conservative proportion of institutional money will open up the potential market for alternative strategies, and entice houses to put these structures together,’ he argues.

And despite the jittery nature of the market, LeChartier said recent pricing of alternatives shows – through the combined returns of such strategies – that they are faring better than long-only traditional managers.

Carne helps firms structure UCITS vehicles in both Dublin and Luxembourg to meet regulatory requirements under the UCITS III directive.

LeChartier said a significant concern previous expressed by fund managers related to the differing regulatory structures that existed in the two domains.

The Irish regulator had first stated it would allow direct shorting within a UCITS III structure, which was unacceptable to many managers. In contrast, the Luxembourg regulator only allows synthetic shorting through CFDs and other derivatives.

However, the Irish regulator has now backtracked on its direct shorting stance and UCITS III will operate out of that region in line with Luxemborg.

The uncertainty surrounding the regulatory view on direct shorting had ’scared’ some investment houses, he said.

Other areas which firms have found difficult to tackle include the filing of their risk management statements and business plans to the regulator, LeChartier said.

‘That’s where we can add value because of the experience we have, and the relationship we have with the regulators’, he added.

Carne also said it can help firms unfamiliar with UCITS III funds procedures to save time and money.