On February 22, the Financial Services Authority (FSA) published a further consultation (CP08/4) on establishing investment vehicles designed to allow UK retail consumers to invest in funds of hedge funds and other alternative investments funds.

The consultation paper proposes the introduction of retail-oriented Funds of Alternative Investment Funds (FAIFs) as part of the UK’s regulated funds regime. The paper initiates a further round of consultation (following on from CP07/6 issued in the spring of 2007) on a number of issues raised by fund managers and interested parties during consultation such as whether the existing repayment standards for Non-UCITS Retail Schemes (NURS) need to be altered to take account of the time required for funds of funds to obtain valuations of assets held in underlying funds and allowing a FAIF (and NURS more generally) to act as “feeder funds” into one master fund. It is also proposed to address a current anomaly under which a NURS can invest in an offshore fund but not where that fund is a feeder fund investing solely in its master fund.

It is proposed to introduce FAIFs into the existing UK NURS regime by: (i) relaxing the existing NURS rules that restrict investment in unregulated collective investment schemes from 20% and allowing up to 100%; (ii) removing the prescription of the 15% rule that prohibits circularity of investment within NURS and to extend this to the UK Qualified Investor Scheme (QIS) regime; and (iii) applying due diligence criteria to investment managers where they invest more than 20% into any unregulated collective investment scheme.

The consultation closes on May 22.