France set to allow onshore single-strategy funds soon

FRENch liberalisation likely after two years' consultation

Product providers in France are optimistic their market's regulator will allow regulated single-strategy onshore hedge funds by the summer after the Commission des Opérations de Bourse (COB) signalled in April it would undertake the regulation of multi-manager hedge funds onshore.

Isabelle Reux-Brown, head of alternative and structured asset management at CDC Ixis Asset Management, said: 'We are still waiting for overall regulation of investment in single-strategy funds, which would be the equivalent of hedge fund regulation, so what has happened already is a first step.'

The COB announced a number of changes to be made to France's regulatory environment in regard to hedge funds following two years' consultation with the industry.

It has established a minimum investment of E10,000 for investors to buy into funds of hedge funds, but will require product providers to demonstrate they have a sufficient level of resources, capacity and competence. They will also be required to detail investment risks and processes in prospectuses to investors.

The COB has given existing operators conditional approval to continue activities, while new product providers will have to apply to the COB for approval.

However, Reux-Brown said opening the retail market to funds of hedge funds might not be the main boon French fund of hedge fund providers receive from regulatory changes.

She said it had not been broadly possible to market unstructured, offshore hedge funds to French institutional investors, a fact that could change under new regulation.

Instead providers had offered structured products, distributed through banks regulated by France's Commission Bancaire, linked to hedge funds.

'Previously [funds of hedge funds] existed, but in the COB's Diversified category, and we could not use such a wide scope of strategies, and there was no publicity or marketing allowed,' she said.

'The changes bring to us the ability to be working with transparency with the clients.'

CDC Ixis AM group currently manages about $2.5bn in funds of hedge funds through its Chicago affiliate Harris Associates, as well as $3bn in direct investments through CDC Ixis Asset Management in Paris and Caspian in New York.

Ernest Boles, managing director of Morgan Stanley Private Wealth Management, said he expected regulators in France to be 'more restrictive [than their Italian counterparts] with respect to guidelines about diversification requirements, but more liberal in respect to the potential universe of investors.'

'With this new regulation, though, hedge funds get a legal status. We expect it will be easier to sell now to specific institutional investors. Although they demand structured products now they will not always [want them] because you lose a little bit of the leverage and performance target,' Boles said.

Reux-Brown added, referring to COB's plans: 'The high-net- worth clients did not necessarily want to go offshore and some were interested in the type of real return we could offer in funds of hedge funds.'