Legal and regulatory protections for hedge fund investors
| Date | 01 December 2002 |
| DOI | https://doi.org/10.1108/13581980210810319 |
| Pages | 336-340 |
| Published date | 01 December 2002 |
| Author | Simon Firth,Alix Prentice |
| Subject Matter | Accounting & finance |
Legal and regulatory protections for hedge
fund investors
Simon Firth and Alix Prentice
Received: 22nd April, 2002
London Financial Services Group, Wilmer, Cutler & Pickering, 4 Carlton Gardens, London
SW1Y 5AA, UK; tel: +44 (0)20 7872 1036; fax: +44 (0)20 7839 3537; e-mail: sfirth@wilmer.com
Simon Firth is a partner in the London
office of Wilmer, Cutler & Pickering spe-
cialising in financial services regulation
and the establishment of investment funds,
including hedge funds.
Alix Prentice joined Wilmer, Cutler & Pick-
ering’s financial services practice in 2002
from the General Counsel’s Division of the
Financial Services Authority (FSA), where
she advised the Investment Business Divi-
sion, concentrating on conduct of business
issues. At Wilmer, Cutler & Pickering she
advises on FSA regulatory issues.
ABSTRACT
A common perception is that, as investors in
hedge funds are afforded a lesser level of legal
and regulatory protections than investors in
regulated products, there is a deficiency in the
degree of transparency and disclosure afforded to
them. This paper examines from a largely UK
perspective whether that is, in practice, the case.
INTRODUCTION
There is a perception that as investors in
hedge funds are afforded a lesser level of
legal and regulatory protection than inves-
tors in regulated products there is a defi-
ciency in the degree of transparency and
disclosure afforded to them. There are in
fact a number of ways, both direct and
indirect, in which a hedge fund investor
can be protected. First, many jurisdictions
only permit certain types of sophisticated
investor to put their money in a hedge
fund and to that extent widows and
orphans do not come into the picture in
the first place. Secondly, where a fund is
listed then listing rules play their part in
providing controls and restrictions which
are ultimately for the benefit of investors.
Indeed, a UK-based hedge fund manager is
required to be regulated by the Financial
Services Authority (FSA), a rigorous disci-
pline on the manager which ensures that
not only is its business subject to scrutiny
and regulatory compliance but also that the
people running the manager are themselves
‘fit and proper’ to do so. Aside from direct
regulatory controls, investors themselves
are ensuring that, through appropriate due
diligence and questioning of managers,
they have sufficient information about the
manager, the fund and its strategy that
they are then comfortable making an
investment. These ingredients of investor
protection are discussed in detail below.
(For the purposes of this paper the discus-
sion centres on a hedge fund incorporated
in the Cayman Islands, managed by a fund
manager established in the UK and listed
on the Irish Stock Exchange.)
HOW DOES THE FSA CATEGORISE AND
TREAT HEDGE FUNDS?
The FSA treats hedge funds as unregulated
collective investment schemes subject to
Page 336
Journal of Financial Regulation
and Compliance, Vol. 10, No. 4,
2002, pp. 336–340
#Henry Stewart Publications,
1358–1988
Journal of Financial Regulation and Compliance Volume 10 Number 4
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