Executive summary - Udo Bullmann

Hedge funds have a structure similar to mutual funds in that they are both pooledinvestment vehicles that invest in publicly traded securities. There are, however, someimportant distinctions, when compared to Table 1:• Mutual funds are highly regulated and restricted in the variety of investment options.• Mutual funds are measured on relative performance such as a market index or othermutual funds. Hedge funds are expected to deliver absolute return.• Mutual funds typically remunerate manager based on percent of assets undermanagement. Hedge funds remunerate managers with very high fees that are geared toperformance.• Hedge funds make requirements on much larger minimum investments (average $1m)than mutual funds. Usually very little of the investment manager’s own money is invested inmutual funds.While mutual funds are available to the general public, hedge funds usually face manyrestrictions in selling their product 3 .”***One of the questions related to investor-protection is, whether a “retailisation” of hedgefunds is under way? We can share the evidence recently highlighted by ECB researchers asfollows:“There is a trend towards the “retailisation” of hedge funds, and several European countrieshave recently permitted the distribution of hedge funds to retail investors, even though,compared to the traditional funds industry, retail investment in FOFH is still very small.Allowing hedge fund products to be distributed to retail investors raises specific investorprotection concerns, such as inadequate disclosure, the risk of mis-buying and mis-selling,the lack of sufficient diversification, disproportionate management costs, etc. Some of theseconcerns can be addressed by only allowing certain variants of hedge funds to becommercialised, such as FOHFs or funds with capital protection.… the United Kingdom’s FSA concluded that there was no great desire on the part of theindustry to produce and sell retail hedge fund products. However, more recently the FSA hasindicated that it might re-examine the prohibition to sell hedge funds to retail investors.Germany, by contrast, adopted at the end of 2003 a new investment act that implemented anew legal framework for domestic hedge funds and the marketing of foreign funds inGermany. The new act explicitly distinguishes between single hedge funds and FOHFs. Theformer are hardly subject to any investment restrictions at all, whereas the latter are subject tomore stringent restrictions, since they are the only hedge funds that can be distributed bypublic offer. For example, the latter are not allowed using leverage or short-selling, can onlyinvest in single hedge funds, and are subject to certain diversification requirements.”The development of regulations in France and Italy will be further considered in part III ofthis paper.***3 Source “Hedge funds – City Business Series”, march 2006.7