The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

FSA Confirms Funds of Hedge Funds to be Fit for UK Retail Market

23 March 2006

London, 23 March 2006:  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, Ireland 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.

The FSA has also raised concern over potential misleading statements or practices concerning asset valuations and by lack of disclosure of the existence of ‘side letters’.

This issue of ‘side letters’ was identified by AIMA last year and an industry working group was established in October 2005, which is examining means of reducing the use of side letters – potentially by moving common issues into the fund’s documentation.

Florence Lombard added: “We are pleased that the FSA has acknowledged the growing importance of an industry which now manages more than US$1.5 trillion in assets worldwide. Over the last few years hedge funds have been at the forefront of the development of the investment management industry, as managers seek new and innovative ways of generating returns for investors.”

- Ends -

For further information, please contact Eoin Brophy, AIMA, or tel +44 (0)20 7659 9919

Editors’ Notes

1. About AIMA

Founded in 1990, AIMA is a not-for-profit global trade association with corporate membership in 46 countries, including over 280 in the UK.  AIMA focuses specifically on hedge funds, managed futures and managed currency funds.  Nearly 1000 corporate members (comprising 3500 individuals) enable the Association to create global tools for the benefit of its members, institutional investors and regulators. Its objectives are to increase investor education, transparency and promote due diligence and related sound practices, and to work closely with regulators and interested parties in order to promote the responsible use of alternative investments. AIMA’s membership includes fund of funds managers, institutional investors, hedge fund managers, prime brokers, exchanges, fund administrators, auditors, lawyers and other specialist service providers. Please visit us at


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