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Aima calls for changes to FSA’s proposed retail access plan for funds of hedge funds


The Alternative Investment Management Association, the international hedge fund industry association, has called on the Financial Services Authority and the UK Treasury to make changes to

The Alternative Investment Management Association, the international hedge fund industry association, has called on the Financial Services Authority and the UK Treasury to make changes to their blueprint for retail access to funds of hedge funds, warning that otherwise the products might not be attractive for managers or investors.

The association has responded to the FSA’s latest consultation exercise, launched in February, on its proposals – first mooted in 2006 – to allow retail investors simplified access to alternative investments through a new regulatory regime for funds of alternative investments funds. It has also submitted its response to the Treasury’s related tax framework document for an appropriate taxation regime for Faifs.

In its formal response to the regulator, Aima has emphasised that it continues to support the FSA’s initiative to create an appropriate regulatory environment for Faifs. The association believes that Faifs should offer retail investors indirect access to the innovative investment techniques pioneered by hedge funds, and has worked with the FSA on development of these products since 2006.

However, Aima believes that the FSA should reconsider some of the restrictions it is proposing for notice periods and leverage, which the association argues are as unworkable in their current form in the context of funds of alternative funds.

It also points to potential difficulties in the areas of illiquid instruments, repayment standards and liability of the manager in master/feeder fund structures. The combined effect of these restrictions, Aima says, will cause managers of Faifs unnecessary difficulty and hinder the funds’ development as a popular form of investment.

In response to the tax framework proposals designed to allow Faifs to operate within its existing regulatory regime, Aima accepts the UK Treasury’s position that these proposals represent a ‘simple solution’ to remove tax as a barrier to the commercial development of Faifs, pending finalisation of a new offshore funds tax regime.

Nevertheless, Aima believes there are discrepancies within the current tax regime proposals relating to the treatment of investment returns as capital gains or income, and argues that it is vital that the tax regimes covering Faifs and offshore funds are consistent and compatible, given the likelihood that the underlying funds held by a Faif will be based offshore. Until this is resolved, Aima fears that the proposed regime does not offer sufficient commercial incentive for existing offshore fund of hedge funds to move onshore.

In addition, the FSA is proposing conditions regarding genuine diversity of ownership. Aima would like to see a grace period in order to prevent temporary difficulties in complying with the rules in certain situations.

‘Aima is encouraged by the FSA’s and HM Treasury’s latest recommendations to enable UK retail investment in Faifs,’ says the association’s deputy chief executive Andrew Baker. ‘On the whole, the proposed rules are appropriate and proportionate, and a strong signal from the UK government that hedge funds are to be regarded as mainstream investments.

‘In Aima’s opinion, there remain important areas to be refined before the regime is likely to be workable and successful for both the industry and the intended retail investors. However, we are confident that considerable progress towards a successful outcome is being made, and we will continue to support the FSA in this process.’

Aima has 1,280 corporate members in 49 countries including hedge fund managers, fund of hedge funds managers, prime brokers, providers of legal and accounting services and fund administrators.

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