Current regulations do not permit German investment firms to market hedge funds in the country and hedge funds based outside German borders are not authorized for public distribution. The latest move will allow institutional investors in Germany to invest in foreign and domestic hedge funds. Retail investors will be regulated to less risky funds-of-funds, according to a Dow Jones report.
Under the proposal, the German financial services authority, BAFin, will authorize hedge funds for distribution in the country after the completion of an official application. Those funds seeking authorization will be required to warn retail investors of the risks of hedge fund investing, including possible total loss of the initial investment, similar to current regulations in Switzerland.
Also, the finance ministry plans to introduce a disclosure requirement to make short selling by hedge-fund managers more transparent and stipulate a general requirement of risk diversification. Otherwise, the ministry said there would not be further, specific investment restrictions.
The hedge fund legislation will make obsolete the sale of complicated structured products designed to get around the current laws. These include the sale of hedge fund certificates; currently the only way hedge funds, or absolute-return products, are accessible to German investors.
Since they were first launched in 2000 to German investors, hedge fund certificates have attracted approximately €5 billion.
A board member with the German BAI association of alternative investments, Dietmar Bahr, told Dow Jones he expects the rule changes to attract up to €150 billion into German alternative investments over the next three to five years. Private banks will lead much of this new infusion of capital with institutional funds either shifting or injecting new funds in the alternative segment, Bahr said.
More information is available at the Ministry’s Web site http://www.bundesfinanzministerium.de (in German).