Legal experts are calling on the securities watchdog to impose a minimum subscription level on hedge funds to ensure only clients who understand and can afford the risk are allowed to trade. The Securities and Futures Commission (SFC) is consulting the market on a proposal to allow fund houses to sell hedge funds to retail investors. The consultation period ends on December 7. The sale of hedge funds to retail investors is banned because of fears the products, which use derivatives and complex investment strategies to enhance returns, are too risky. The proposed relaxation would allow fund houses to sell the products to investors, but full disclosure must be made about the risks. James Walker, partner and head of the Asian funds group at international law firm Clifford Chance, said changing the rules to allow hedge funds to be sold to retail investors would help boost Hong Kong's role as a regional fund-management centre. But he said only certain, qualified retail investors who understood the risks inherent in trading hedge funds should have access to the products. While some fund managers oppose the introduction of a minimum subscription level, saying it would discourage small investors from trading the high-risk products, Mr Walker said a minimum subscription levels of about US$10,000 or US$30,000 would be affective. He also suggested the SFC use a sliding scale, setting minimum subscription levels according to the risk profiles of the various hedge funds. 'The initial minimum subscription level for the hedge fund sales would help to ensure only the investors who could afford the risks would invest in the products,' Mr Walker said. He said hedge funds were new products to Hong Kong investors and it would be better to have a minimum subscription when the products were first introduced. The SFC could review the market after a year to see if it needed to change the minimum subscription level, he added. In addition, Mr Walker said the SFC should not regulate too heavily fund-of-funds, funds which invest in other funds. In the case of hedge funds, one unit in a fund-of-funds would be equal to buying a basket of hedge funds. In Singapore, which has just introduced hedge-fund regulations, each fund invested in by a fund-of-funds needs approval by the securities regulator. The Hong Kong consultation paper does not clearly explain how the constituent funds of a fund-of-funds would be regulated. SFC executive director Andrew Procter has hinted that Hong Kong might require all hedge funds invested in by a fund-of-funds SFC approved. But Mr Walker said this would create operational difficulties for managers of fund-of-funds. He said those managers often spread investments over as many as 30 different smaller hedge funds and it would be impractical to get SFC approval for each of these investments. The SFC should regulate managers of the fund-of-funds, but should not require individual approval for the funds, he said.