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Derivatives

U.K. Mutual Funds With Innovative Underlyings Take Off

The Financial Services Authority has given the go-ahead for a form of mutual funds known as an open-ended investment company (OEIC) to give investors exposure to hedge fund indices.

The Financial Services Authority has given the go-ahead for a form of mutual funds known as an open-ended investment company (OEIC) to give investors exposure to hedge fund indices. The OEIC, structured by Bespoke Financial Consulting with Dresdner Kleinwort Wasserstein, is compliant with European legislation, known as UCITS III, which allows it to be sold across Europe without seeking each regulator's approval. The structure will likely encourage European asset managers to launch similar OEICs in the U.K., said officials.

Tim Cornick, a partner in the investment funds group at City law firm Macfarlanes, said the widening of derivatives use in UCITS III funds offers interesting possibilities for innovative structures. "It's just about a racing certainty that some very innovative products will now be coming out within UCITS," said Cornick. Jacqueline Kerr, head of mutual fund investments at Standard Life in Edinburgh, said she expected the OEIC structure to become more popular as a vehicle for structured products. "The IFAs are comfortable with the transparency of OEICs," she noted. Kerr said Standard Life will focus on FTSE-linked structures, however, she said the group is always looking at other market developments.

Robert Addison, partner at Bespoke Financial Consulting, said, "The use of derivatives in mutual funds has been slow to develop because of the complex nature of the derivatives and the ongoing regulatory requirements." These are expensive products and they take time to develop, unlike warrants or certificates, noted one structurer. The OEIC is retail- and trust-friendly, however, and can take derivative products to a larger client base. "This gives investors an increased choice," noted Jonathan Kent, deputy cio at Kleinwort Benson Private Bank.

 

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