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Ucits III limits on hedge fund leverage not ‘appropriate’, says FSA

The FSA says significant constraints on leverage proposed in the Ucits III directive are not appropriate for hedge funds.

Speaking today at a FSA international fund forum in Monaco Dan Waters said the regulator would be worried that concern over leverage could lead to prescriptive product regulation across the board for hedge funds.

He said: “In the Ucits III directive there are significant constraints on leverage. It does not seem to us that this approach is appropriate for hedge funds, which are not generally marketed to the retail public – indeed in many European countries such marketing is banned – and which moreover very often display volatility of returns far lower than more traditional funds on offer in the market.”

Waters acknowledged that the deleveraging of hedge funds may have played a “non-trivial role” in excacerbating financial instability in the crisis but concurred with the view of Jacques de Larosiere that the industry did not play a “major role” in its emergence.

He said it was vital that regulators had sufficient information about the trading of hedge funds to evaluate any risk posed to the wider financial markets.

However, he said clarity about the purposes of leverage is paramount to avoid “gratuitous and destructive intervention” in hedge fund management strategies.

He warned: “The end result is more often destruction of legitimate and profitable investment opportunities for institutional and sophisticated investors than the prevention of any significant threat to financial stability or consumer protection.”

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