The UK’s Financial Services Authority set out proposals that would allow retail clients to invest in funds of hedge funds and other alternative investments.

Retail investors are already able to get exposure to hedge funds and other alternative products in a variety of ways, including structured products. The FSA says it now believes the time is right to allow the development of retail-oriented Funds of Alternative Investment Funds (FAIFs) within its regulatory regime. “This would bring substantial structural and operational safeguards including the requirement to have an independent depositary, strict rules on independent valuation of underlying assets and timely redemption of investments,” it says.

The FSA proposals would, among other things: introduce retail-oriented FAIFs into the existing regulatory regime; lift the existing 20% investment restriction into unregulated collective investment schemes; and, apply due diligence guidance for fund managers producing FAIFs.

Dan Waters, FSA director Retail Policy and Asset Management sector leader, said, “Asset management is a dynamic and innovative industry and we believe it is important that consumers can get access to the latest techniques to manage their own savings and investments. We think the time is right to permit access to a wider range of innovative strategies through authorized onshore vehicles. This will allow investors more choice and a better opportunity for risk diversification, whilst maintaining investor protection through our rules on the operation of the product.”

The consultation will close on June 27. The FSA will then finalize the draft rules in light of the responses and publish a policy statement giving feedback towards the end of the year. This will set out the rule changes and the date on which they will come into effect.