US hedge fund giant Amaranth's $6bn loss is likely to reinforce the Financial Services Authority's view that retail investors should not be allowed to invest directly in hedge funds, according to a senior lawyer. Philip Rubens, partner at Finers Stephens Innocent, said that although individuals would soon be allowed to invest in fund of funds the problems in the US could reinforce the regulator's fears about direct access to the funds by UK investors. The proposals for fund of funds were unveiled in March.

"This might be one of the reasons why the FSA is not keen on retail investors having the opportunity to invest directly in single managed funds. You can imagine a situation where if retail investors are allowed to invest directly into single manager funds, a retail investor could literally find that 50 per cent or more of the fund could be wiped out. I think this reinforces their view that retail investors should not be allowed to invest in single manager funds," he told Complinet.

Rubens' comments follow revelations that Amaranth suffered spectacular losses from huge bets it made on the natural gas market. It is estimated that 35 per cent of the fund had been wiped out following drops in energy prices. The fund announced that it would move out of the energy market following the losses.

According to industry sources the FSA is monitoring the situation but would not comment when contacted by Complinet. Rubens, while not speaking directly about Amaranth, said that the regulator was likely to be looking at systems and controls issues at hedge fund managers in the UK. It was also likely to look at whether a similar situation could arise here, he explained.

"There may be some circumstances where funds don't understand the risks they are taking and perhaps they don't have adequate risk management systems. Issues such as that would be of concern to the FSA and, in particular, the hedge fund team.

"The FSA is very keen on ensuring that funds do have adequate systems and controls, although I'm not suggesting that this particular fund does not have adequate systems and controls," he said.

The US Securities and Exchange Commission is thought to be monitoring the situation at Amaranth. Christopher Cox, its chairman, last week said that the problems were a reminder that investing in hedge funds was a potentially risky business. US politicians have called for tighter oversight of the hedge fund industry as well as increased transparency from the funds themselves. Amaranth has pledged to stay in business and talks are thought to be taking place with a number of investment banks about a possible sale of part of its business. The firm also faces possible legal action from investors regarding the fund's risk management procedures.