The German hedge fund product market is continuing to grow, due to regulatory changes that clarify hedge fund investments for both retail and institutional investors. This will likely boost the fund derivatives market, as both groups of investors are seen to be risk averse and may favor structured products such as hedge fund certificates over direct investments in hedge funds.
A proposed legislation change to allow insurance companies to invest up to 5% of their assets in hedge funds is expected to increase demand for fund-linked products. The move comes hot on the heels of a rule change, which allows retail investors to invest in hedge fund products. "Regulation change is helping the fund derivatives business in Germany to grow very quickly," noted one official. Although there is now greater clarity for investors, they are also restricted by the regulation. "It's a fine balance to tread," noted Mehraj Mattoo, head of alternative investments at Dresdner Kleinwort Wasserstein in London.
Another factor that could potentially damage the growing market is the number of hedge funds prepared to disclose regular net asset value data and which have sufficient liquidity for investors. "It could be three to five years before there are enough hedge funds with a good reporting record to help build this business," said Helmut Fischer, executive director in the alternative investment strategy group at UBS in London.
