Regulatory Change To Drive Onshore Fund Growth
Wednesday, May 09, 2012
French hedge funds and the securities regulator AMF believe the Alternative Investment
Fund Managers Directive (AIFMD) will - more than UCITS - boost investor confidence
in hedge funds and pave the way for potentially significant asset growth.
Participants at Opalesque's third France Roundtable, held in April 2012 in
Paris and sponsored by Lyxor Asset Management and Eurex, believe the AIFMD will
have a major impact on the hedge fund industry in Europe. Some of the largest
funds of funds, like Amundi Alternative Investments, have already shifted their
model from offshore to a 100% onshore, European regulated framework. This includes
a re-domiciliation of most wrappers (i.e. the funds of hedge funds themselves)
as well as their underlying fund structures to onshore jurisdictions. Amundi
says the firm is already now fully ready for the arrival of the AIFMD, and explains
that this shift was mainly motivated by concerns from their French institutional
Patrice Bergé-Vincent, head of the Asset Management Regulation Division
at French securities regulator AMF, pointed out that over the next years the
industry will come to a clearer distinction between UCITS and AIFM. UCITS products
will be more directed to retail investors and AIFs will be reserved for the
most sophisticated investors. However, he warned that the increased focus and
activities of the Financial Stability Board (FSB) around market regulations
may soon turn into a new regulatory paradigm that could be a “new concern
for the asset management industry going forward".
A report released in December also suggested that the AIFM Directive will lead
to some re-domiciliation of alternative investment funds to onshore locations
in Europe. However, it concluded that offshore centres such as the Cayman Islands
are expected to continue to be major domiciles for these funds.
The study, commissioned by the Association of the Luxembourg Fund Industry
(ALFI), looked at which major offshore centres are currently
used by alternative investment funds, looking separately at hedge funds, private
equity funds and real estate funds. It also looked at potential future trends
and how they may impact the choice of fund domicile in the future.
The report found that some AIF managers, who would otherwise have decided
to domicile offshore, will decide to domicile onshore due to regulatory reasons
and investor demand, with European onshore funds likely to go to Luxembourg
or Ireland. It is also expected that there will be greater co-domiciliation
and clone fund structures between offshore and onshore jurisdictions under the
The report also predicted that another major offshore funds centre could emerge
in the Middle East or Asia because there is clear demand from both investors
and investment managers for such a centre.
The report highlighted significant variations amongst asset classes in terms
The Caymans are a clear frontrunner for hedge funds (43% of the market), receiving
substantial business from both US and UK based managers because of their history
and credibility with managers and investors.
Delaware, with 20% of the market, is mainly utilized by US-based hedge fund
managers catering to a largely US client base.
The British Virgin Isles and Bermuda (10% each) are popular among both European
and US hedge fund managers, because of both historical links to Europe as well
as proximity to the US. Ireland (8%), Luxembourg (4%) and the Channel Islands
(5%) are mainly popular among European hedge fund managers.
For Private Equity funds, Delaware is the main centre in the US and has the
most developed private equity market, with 60% of worldwide private equity assets.
Outside the US, 90% of private equity funds are domiciled onshore. Luxembourg
currently has 9% of the Private Equity market worldwide.
Real Estate funds follow a similar pattern to private equity funds, because
of the similar fund structures and fund life cycles, for example Delaware is
the main centre with 47% of worldwide assets.
However, the Channel Islands with 25% of the market, are popular among UK real
estate funds for historic reasons.
Luxembourg (11%) is the preferred domicile for European investors because of
the range of vehicles available.
Marc Saluzzi, Chairman of ALFI, said: “Whilst it was widely believed
within Europe that a consequence of the AIFMD and the related regulatory pressure
exercised by the G20 countries, would be widespread re-domiciliation of funds
into EU domiciles, and a fall in the number of offshore funds, this report demonstrates
that the offshore landscape in the last two years has remained stable.”