Listing rules under review by FSA

The FSA is to consult on the introduction of additional categories of retail funds, including hedge funds, in the first quarter of 2003.

Changes to UK rules to allow hedge funds to list on the UK stock market, making it easier for retail consumers to invest, is one of the options the FSA is exploring in an effort to regulate the vehicle.

In its Discussion Paper published in August, the regulator suggested changes to the listing rules to allow for shorting, noting that the listing regime is already under review, so now may be an appropriate time to make any changes. Single manager funds cannot list in the UK because, under the listing rules, shorting is only acceptable for the purposes of efficient portfolio management.

This may involve setting a maximum percentage of the assets of the fund that can be put at risk from any one short position, similar to the current 20% concentration limit on long positions in funds currently eligible to list. The FSA anticipates this would be lower than the 20% allowable on long positions.

Another option would be to allow hedge funds to fall under the FSA remit of collective investment schemes (CIS). The hurdle in this area, according to the regulator, is that there is no generally accepted definition for hedge funds, making it virtually impossible to have a category of regulated CIS that covers all types. However, the FSA has suggested certain strategies of hedge funds that can be defined could be incorporated. These might include funds of funds or clearly defined strategies, such as long/short equity or fixed income arbitrage.

The FSA has noted it would require significantly greater disclosure of information to consumers in these products. While it does not specify exactly what this may mean, it did say that it will need to give weight to the type of information that would be available to consumers about the nature and risk profile of the fund, both at the point of sale and thereafter.