EU watchdogs allow hedge fund indices in UCITS

BRUSSELS (Reuters) - Stock market watchdogs gave their conditional blessing on Tuesday for the inclusion of hedge fund indices in European Union-regulated funds for small investors.

The European Commission, the bloc's top financial regulator, had asked the EU's 27 national market supervisors to see whether consumers should be given a wider choice by allowing hedge fund indices in funds known as UCITS.

Such indices would give small investors indirect exposure to a global sector where assets have shot up to $1.5 trillion (730 billion pounds), triggering concerns among some politicians that the loosely regulated industry needs greater supervision.

In some EU states, small investors are barred from investing in hedge funds directly.

Most funds in the EU are UCITS, seen as the gold standard of open-ended mutual funds, and they represent 5.5 trillion euros of assets.

In return for allowing firms to offer them across the EU, they are heavily regulated to protect investors.

The watchdogs that make up the Committee of European Securities Regulators published a common approach to hedge fund indices and UCITS.

The committee said the indices would have to comply with several conditions in addition to what was already laid down in the UCITS rules on eligible assets.

Those extra conditions should include the banning of any "backfilling", or retrospective changes to previously published index values, the committee said in a statement.

There has long been concern over statistical bias in hedge fund indices, with questions over whether they were a proper benchmark for investment.