Newcits not suitable for retail investors
Sister publication Ignites Europe this morning reports on the growing debate over whether Newcits are suitable for retail investors.
Newcits are hedge fund strategies that have been put in a Ucits wrapper, making them widely available across the European Union. The French regulator, AMF, says Newcits should be treated as complex products, with stricter controls on their sale than ordinary Ucits, Ignites Europe reports. AMF claims it has support from other regulators.
It also seems to have support from someone with the interests of the hedge fund industry at heart - Antonio Borges, chairman of the Hedge Fund Standards Board. As reported in an interview with Mr Borges in FTfm, he thinks there is a moral hazard danger for investors with Newcits. The fact these funds are regulated may persuade investors they do not need to look too closely at them - imparting a false sense of security, and creating the opportunity for more Madoffs.
Hedge fund strategies are for professional investors who understand the risks involved, says Mr Borges.
The question of whether alternative investment strategies are suitable for sale to retail investors has not really been properly debated. There was talk a couple of years ago of expanding Ucits to include alternative investment sectors, but it was not followed through.
But it turned out that Ucits III allowed hedge funds to move into the regulated retail fund sphere with ease. It seems some regulators are now wondering whether that is really a good idea.
From the point of view of consumer protection, there is an argument for taking a look at the risks retail investors can reasonably be exposed to via investment funds, and whether Ucits II has allowed entry by the back door for strategies where the risks are hard for investors to assess.
Some Newcits managers impose high minimum investment requirements to discourage unsophisticated investors from using their funds. But there are wider questions about possible damage to the Ucits brand if a Newcits fund goes wrong, and of managers who want to increase assets under management being irresponsible in the marketing.
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