It’s common knowledge that establishing a hedge fund in the United Kingdom has always been difficult. This process is often more complicated and time-consuming than, say, in the United States or in the EU countries. It takes at least three months to open a hedge fund in England if you are lucky enough. The process is so complex that many new firms hire an external company to enlist the support of such a fund and ensure full compliance with all laws and regulations. Otherwise, the process may become even more complicated and ultimately end in nothing.
Below, we will discuss some aspects of establishing a hedge fund in the United Kingdom, as well as the latest changes in UK financial legislation related to hedge funds. This information will be relevant for those who wish to register an investment fund in the UK or establish a hedge fund in the EU.
Many national regulators have introduced restrictions on short selling as a result of COVID-19. Restrictions on short sales were not imposed by the FCA, although the regulator complied with the decision of the European Securities and Markets Authority (ESMA) to change the threshold for reporting net short positions from 0.2% of issued share capital to 0.1%.
FCA informed the public that since May 2020, restrictions on the sale of short positions in Austria, Belgium, France, Greece, Italy and Spain have been lifted. This was long-awaited and very happy news for market participants and those who are about to establish a hedge fund in Europe.
FCA also announced updated position limits for some derivatives traded on UK trading floors. The reason for the change, apparently, is the recognition by the FCA that the limit of 2500 lots may worsen the functioning of markets in a rapidly changing market. Now everyone is looking forward to the regulator announcing a revised limit. The market should become aware of these two months before these limits take effect.
In customers’ defense The principle of the hedge fund has always been such that it is based on a free choice of investment style. The law does not greatly affect the choice of investment instruments. They have the right to practice many strategies that ultimately make a profit. Unlike other investment companies, a hedge fund may remain in positive territory even if the market falls. This is its main feature. Financial opportunities and all kinds of investment options are not limited by the legal framework.
Only institutional investors can invest in hedge funds, in rare cases private, but even here the minimum investment amounts are quite high.
Simple investment companies are strongly clamped by the current legislation. They can carry out narrowly focused activities, and at the same time are deprived of the opportunity to apply various strategies related to the sale of securities. This leads to the fact that when the market falls, investors will inevitably remain at a loss. Nothing can be done about it. In such situations, the advantages of hedge funds are felt, which can benefit not only on growth but also on a significant drop in prices.
However, some time-bound restrictions are being introduced to help eliminate the harm that could potentially be done to customers. The English regulator will take steps to ensure that investment products provide value for money and are sold on fair and not misleading conditions.
FCA will ensure that companies prepare and implement risk management strategies step by step, which is a prerequisite for firms to switch to the London Interbank Offer Rate (Libor) for short-term interest rates in the global financial market.
Focus on SMCR
FCA also said it will pay more attention to the investment management sector. Firms will now be required to implement Senior Managers and Certification Regime (SMCR) systems to achieve this goal. If you want to open an investment fund in the UK, compliance with and implementation of the SMCR system for fund managers is a prerequisite.
To obtain such certification, it is necessary to more carefully approach the assessment of managers in order to develop a business culture where the right leadership and fair results for customers are central.
Changes in the UK’s financial market are happening rapidly. We are following the latest news in the provision of financial services in the English markets. Hedge fund managers must immediately implement all new requirements from the Office of Financial Regulation and Supervision.
You can request a personal consultation on the regulation of hedge funds in the UK if you have additional questions.