EU mutual funds seek to emulate hedge funds

Date: Sunday, April 8, 2007
Author: John Rega Bloomberg News

BRUSSELS: European mutual funds may be able to give ordinary investors a taste of hedge fund returns, if their managers convince regulators to let them buy derivatives of hedge fund indexes.

Indexes linked to hedge funds' performance, which were ruled unsuitable for mutual funds last year, are increasingly standard financial indicators, fund industry representatives argued Monday at a hearing before the Committee of European Securities Regulators in Paris.

Support from regulators would let European Union-regulated funds put some of their €5.5 trillion, or $7.3 trillion, of assets into derivatives tracking the indexes.

The shift would open another avenue for so-called retail investors to share in the gains of hedge funds.

"It's an interesting, safe way to access the hedge fund market," said Caelim Parkes, who heads structuring and marketing for Europe, the Middle East and Africa at MSS Capital, which is based in London and manages the FTSE Hedge index. "The retail market is a hugely untapped area in terms of hedge funds' asset raising," Parkes said before the hearing.

Hedge funds are mostly private and unregulated pools of capital with which managers can buy or sell any assets, and participate substantially in the profits of the money invested.

The Committee of European Securities Regulators signaled tentative backing Feb. 6 for the right to buy derivatives linked to hedge funds.

The group, a consortium of national authorities, suggested in a policy paper that clearly defined indexes, which publish how they measure performance and are audited annually, may now be suitable.

The committee had ruled against using such instruments in January 2006, then reopened the question last October. The regulators will consider written comments submitted by April 16 as well as the arguments at the hearing Monday.

The European Fund and Asset Management Association has called on the regulators committee to judge hedge fund indexes on the same grounds as any other type of financial index permitted for funds authorized by the EU.