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Funds-of-Hedge Funds Gain World Interest

DUBLIN - The retailization of hedge funds seems to be gaining momentum overseas, and international regulators are taking a cautious approach to the growing demand. But investment professionals in the U.S. are expressing little concern for, and no interest in, providing this product to the average investors.

Hedge funds were a hot topic for debate at the sixth annual Global Funds Conference sponsored by the Dublin Funds Industry Association (DFIA) and National Investment Company Service Association (NICSA) here, held in the historic Dublin Castle. Panelists were mixed on the sensibility of bringing hedge fund products to this class of investor throughout the world, despite the host country's recent introduction of a retail fund-of-hedge funds.

Alexander Ineichen, managing director and head of equity derivatives research for UBS Warburg in London, said that the retail investor should absolutely be allowed to invest in funds-of-hedge funds and even hedge funds themselves. Speaking on a panel on "Alternative Investments/Hedge Funds," Ineichen argued that diversified hedge fund portfolios are more conservative than diversified long-only portfolios. He also contended that if retail investors are allowed to invest in stocks, the riskiest asset class, they should be afforded the opportunity to invest in hedge funds, or funds-of-hedge funds if they so choose. "Will they get the best deal? I hate to be cynical, but it seems unlikely," he said, adding they should at least be given the option.

"Although there is some nervousness on the part of the regulators, there seems to be a growing appetite among the investing public in Europe for access to retail hedge fund products," said Sean Langdon, business development manager at fund and asset management firm IDA Ireland.

Langdon said that the old notion that hedge funds are questionable or shady products is starting to dissipate in Europe. "As well-known institutional investors increasingly began to establish and invest in hedge funds and major names like Merrill and Goldman Sachs took on the role of prime broker, they became regarded as more respectable. Then as the investment managers demonstrated that hedge funds could not only help reduce risk but also yield higher return than long-only funds, they became acceptable," Langdon said.

Gaining Momentum

The boon has really come in the last year as a number of countries have introduced legislation to allow lower-end investors access to this tool. In December, the Irish Financial Services Regulatory Authority issued a notice introducing a retail fund-of-hedge funds. "Speaking as a potential investor, this development is to be welcomed as it allows the retail investor to benefit from, rather than read about, the opportunities of positive returns in falling markets," Gary Palmer, chief executive of the DFIA, said at the time of the announcement. There is a minimum investment of 12,500 Euros to invest in a retail fund-of-funds in Dublin.

Langdon said that Ireland has for some time permitted funds-of-hedge funds for institutional investors, but only opened up the product to the retail segment last year. "No schemes have yet been approved, but there are a couple in the system under consideration," Langdon said. "It is just a question of time before we become the first in the European Union to approve retail funds-of-hedge funds."

However, Dublin, often regarded as a progressive leader for alternative investments and offshore investments, is not the only country moving in this direction. Recently, the French regulator, Commission des Operations de Bourse (COB), turned its sights towards the retail investor. The COB set a 10,000 Euro minimum investment for retail investors in funds-of-hedge funds. Regulation of the product in the country is currently strict, but the move indicates a growing demand for the product.

Late last year, both Hong Kong and Singapore approved the hedge fund product for the retail investor and issued guidelines. Buy even in countries that have begun to embrace hedge funds, there have been clashes between regulators and providers. Germany has also recently said it will consider bringing this product to the retail investor.

However, not every country is behind the movement. The U.K. regulator, the Financial Services Authority, said in March it would not provide regulations for the product due to lack of hedge fund personnel to bring the product to this class of investor.

In the United States, hedge fund managers voiced their total lack of appetite for the retail investor during the Securities and Exchange Commission's two-day roundtable on hedge funds in May. Speaking at the roundtable, James R. Hedges IV, founder, president and investment chief of LJH Global Investments, said the industry has "no interest whatsoever in selling their product to a retail audience."

The hedge fund industry has grown so significantly in the U.S., to nearly 6,000 hedge funds and $650 billion in assets under management, that the SEC has looked into the retailization of the product. While investment minimums have dropped to $25,000 in funds-of-hedge funds in some extreme cases in the U.S., the industry doesn't currently sell to retail investors.

However, Congress recently held a hearing on hedge funds to look into whether hedge funds are suitable for retail investors, and several Congressmen said they do not think they are appropriate.

Nonetheless, some speakers at the Dublin conference believe that despite their unsuitability for retail investors, investment firms are going to bring them to this market. "We think the product is going mainstream," said Steven Spiegel, senior managing director and chief of global distribution for Putnam Investments. "We also think it's inappropriate for the majority of investors."

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