A type of fund which guarantees returns despite falling markets is to be the subject of increased regulatory scrutiny.
A type of investment vehicle known as absolute return funds (ARFs) are to come under the regulator's spotlight, the Daily Telegraph reports.
The Financial Services Authority (FSA) is to take a special interest in the funds due to the potential risk they might cause investors. The key selling point of these products is that they offer positive returns whether or not stock markets fall.
This promise is being put to the test due to the recent volatility on the markets caused by the credit crunch. However, it is these adverse conditions that have pushed many investors in to ARFs - as they are nervous of losing money in conventional products.
Accordingly, the largest ARF on the market, BlackRock's Absolute Alpha, has swelled in size from £200 million to £1.5 billion over the past 12 months.
The FSA is set to take a particular interest in how the funds guarantee the returns in falling markets, a spokesman said.
"We want to better understand how the funds are developed and what consideration is given at the product development phase to risk management and treating customers fairly; to learn more about the marketing distribution of ARFs; and to assess the role of ARFs within the asset management industry as a whole," he added.
The seven ARFs available to UK investors that have been on the market for a year or more have returned an average of five percent over this period.
