The Financial Services Authority, the UK regulator, is considering how best to market new authorised funds of hedge funds to retail investor...

The Financial Services Authority, the UK regulator, is considering how best to market new authorised funds of hedge funds to retail investors. The FSA said it will consult next year on these products which would be subject to its regime for authorised collective investment schemes. The regulator felt that retail investors are already gaining access to products with hedge-fund investment characteristics through a variety of means, including listed funds of hedge funds and funds offered on the internet from European jurisdictions, in an unregualted manner. The funds would be subject to structural and operational safeguards including the requirement to have an independent depositary. The fund of hedge funds managers will not be able to invest into all hedge funds – there will be liquidity criteria, for example, in respect of the underlying funds. The decision to consult is published today in the FSA's feedback to Discussion Paper 05/3 Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World. The paper discusses consumer segmentation and testing for levels of investors' sophistication. The FSA recognises that HNWIs can declare their status as sophisticated investors, providing them with access to a wider range of products which inherently carry more more risk. An FSA spokesman told WealthBriefing: "A test of sophistication is difficult to implement practically, especially if it would cover a number of different products. Minimum investment thresholds were seen as the simplest option to enforce, although these were seen as a poor proxy for financial capability. "Net worth also fails to take account of liquidity. For example a client may have substantial assets, but tied up in pension funds," said the spokesman. The consultation will also focus on consumer education and awareness, and product provider responsibility. The FSA will shortly be publishing a consultation paper on changes to the Listing Rules for investment entities, which are designed to provide investment entities with greater choice in their selection of investment strategies.