Mutuals clamour for access to hedge funds

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, Bloomberg reports.

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

Backing from regulators would let European Union-regulated funds put some of their €5,500bn 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 London-based MSS Capital Ltd., which manages the FTSE Hedge Index. ‘’The retail market is a hugely untapped area in terms of hedge funds’ asset raising.'’

The regulators’ group, CESR, signaled tentative backing for the right to buy derivatives linked to hedge funds last month. The 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 group had ruled against using such instruments in a January 2006 decision, then reopened the question last October. The regulators will consider written comments submitted by April 16 as well as the arguments at today’s hearing.

The European Fund and Asset Management Association has called on CESR to judge hedge fund indexes on the same grounds as any other type of financial index permitted for funds authorised by the EU. ‘’Investors should be able to benefit from products that allow additional diversification and keep up with financial product innovation,'’ as long as existing rules are met, the Brussels-based trade group said in an earlier consultation letter.

In Britain, meanwhile, the FSA is moving towards a regime where retail investors are permitted to invest directly in fund of hedge funds, so long as the managers of such funds follow stringent guidelines.

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