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 clients.

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 directive.

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 of domiciliation.

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.”