LONDON (HedgeWorld.com)–The Investment Management Association made public its response to a discussion paper issued by the United Kingdom’s Financial Services Authority, concerning possible changes in the regulation of hedge funds.
The FSA in particular wanted the industry’s reaction to the prospect of onshore hedge funds being made available to retail investors. IMA’s comment emphasized two points: it wants the tax regime for hedge funds liberalized, but it wants the FSA to be very cautious before allowing a wide range of hedge funds to be authorized for marketing to retail investors.
“The majority of our members favor an evolutionary approach, with the possibility of regulated onshore hedge funds for non-retail investors as a first step,” it said.
The IMA has hedge fund members, but it has a wide variety of other investment vehicles in its membership as well: life insurers, investment banks and unit trusts. These institutions see themselves on the one hand as in actual or potential competition with hedge funds, and accordingly anxious to preserve a level playing field, but on the other hand, many such members invest in hedge funds themselves on behalf of institutional or private clients.
The IMA comment acknowledged some skepticism about whether hedge funds would re-locate onshore even if welcoming changes were made. “It is not possible for IMA to assure the FSA that, should there be provision for onshore regulated hedge funds, coupled with necessary changes to the tax regime, there would be a load of applications. Many funds are well established as offshore vehicles and are likely to remain so.”
Nonetheless, the IMA did not advocate standing pat. It said that a new regulatory regime would have to be devised, and it offered its help to the FSA in working out the particulars.
The new regime the IMA’s remarks contemplated would distinguish between different hedge funds on the basis of strategy. Market neutral funds, and the long/short equity finds, are the most obvious candidates for availability to retail investors, it said.
As to taxation, the IMA acknowledged that this is not in the purview of the FSA, but it said it will ask the tax authorities to reconsider their approach to capital gains, especially “the outdated distinction between trading and investment activities. All funds that have the objective of earning returns for investors should be taxed as investment funds irrespective of the nature of their transactions.”