GERMANY – The German hedge fund market looks set to open up following the passing of a new law by the German parliament’s lower house, the Bundestag.

The Bundestag passed the proposed law on Friday, which will allow single manager hedge funds to be sold to investors and funds of hedge funds to be sold to a broader investor base.

The law faces one more test before being finalised – within the next six weeks the Bundersrat, the upper house of the German parliament, will have to give its approval. Market participants are confident that the bill will be approved.

Commenting on the passing by lower house, Matthias Schellenberg, head of alternative investment sales in Germany and Austria for Pioneer Investments said: "This is a major step ahead for the hedge fund market in Germany. However, there still remains one hurdle in the shape of transparency requirements of the tax act which sits alongside the new law. Some fund of funds may fund it difficult to comply."

The 170-page draft of the new Investment Law which contains the hedge fund legislation was issued by the government in July. The section regarding the regulation of hedge funds proposed the first legal framework for hedge funds in Germany, as hedge funds are currently unregulated.

The proposals will allow single hedge funds to be invested in via “private placements”, while hedge funds of funds will be available to retail and institutional investors. No distinctions will be made between domestic and foreign funds, and nor is it planned to restrict certain strategies - both leveraging and short selling will be permitted.

It is hoped that the bill will come into effect at the beginning of 2004, and the hedge fund market in Germany is expected to be significant as a result.