Onshore funds using derivatives and short selling to offer absolute returns are gaining momentum in the U.K., as fund managers look to exploit regulatory changes. Piers Lowson, financial services consultant with Barrie & Hibbert in Edinburgh, said he is working with a handful of fund managers on deals for U.K. retail investors and he expects this to increase. Because the funds are regulated, they are deemed low risk and so appeal to independent financial advisors and their retail clients. "There will be a number of these deals in the next few months," he predicted.
Tim Cornick, partner at City law firm Macfarlanes, agreed onshore absolute return funds are a buzz area right now, "The use of derivatives is suddenly lighting up lightbulbs in people's minds." But he added, "A lot of people are still trying to get their heads around what they can do in these funds." Lowson said fixed income strategies were the most popular proposals he has seen, although there have been some plans for long short equity funds following a recent launch by Merrill Lynch Investment Managers.
U.K. regulator the Financial Services Authority confirmed last year it had interpreted the European UCITS directive on fund management to allow short selling of securities within onshore retail funds (DW, 10/8/04). But market officials noted up to now most fund managers have not made use of the rule change, principally because they are not familiar with short selling and derivative strategies and have taken time to get comfortable with such trades.
