December-January 2013

ALTERNATIVE FUNDS: First-mover advantage?

WindmillCompetition between fund domiciles is intensifying as the Alternative Investment Fund Managers Directive approaches and hedge fund administrators are upping their game. The Netherlands has emerged as a challenger for alternative investment business, writes Stefanie Eschenbacher. The Netherlands was the first country to introduce draft legislation to implement the European Commission’s Alternative Investment Fund Managers Directive (AIFMD) into national law. This draft is expected to be adopted shortly and implemented by July 22, 2013. The directive deals with stricter regulation on alternative investment fund managers, such as hedge funds, private equity and real estate investment managers. As this issue of Funds Europe went to press, the Level 2 rules that deal with implementing regulatory and technical standards, and elaborate the general requirements for asset managers in more detail, had not been released. However, locals say the first-mover advantage will help the Netherlands when it comes to attracting those that are already considering redomiciling, especially when it comes to hedge fund administration. Bastiaan Siemers, chairman of the AIFMD working group at the Holland Financial Centre, says how the interpretation of the directive will differ from that of other countries will depend on the Level 2 rules, which are about to be published. “Under the AIFMD there are not many competitive edges one jurisdiction has over the others,” Siemers says. Once the Level 2 rules are published, aspects such as the appointment, duties and functions of depositaries, the calculation of leverage and transparency requirements will be clearer. Mark Baak, a member of the same working group, predicts that there will be a “significant shift in redomicilation” in the sense that offshore hedge funds will move onshore. “This will be beneficial for local service providers and administrators,” he adds. TAX HIKES
Other EU, other countries, like Switzerland and France, are also stepping up their regulatory efforts. “On the first day François Hollande was elected president in France, we got a call from a French asset manager wanting to relocate fearing tax hikes,” says Baak. “We are in the process of setting up a fund for a Swiss investment advisor here in the Netherlands as an example of managers benefiting from the swift Dutch alternative investment fund manager process.” Hans Janssen Daalen, general director at the Dutch Fund and Asset Management Association, says it is fair to say that the Netherlands tries to position itself as a country of choice for establishing alternatives. “The Netherlands traditionally is a country in which non-Ucits have dominated the market. Except for the investment restrictions, the regime for alternative investment funds has always been the same as goes for Ucits,” he says. “Therefore, the Dutch government took a quick and liberal approach to the implementation of the AIFMD, no gold-plating whatsoever.” Janssen Daalen says except for additional transparency rules, these funds can also be offered to retail investors in the Netherlands. “Due to this long-standing tradition, Dutch investors, also in the retail area, have an open mind when it comes to investing in alternative investment funds,” he says. “They are not perceived as the dangerous predators as the attitude in many other places sometimes seems to be.” Janssen Daalen says considering the pension funds market in the Netherlands, there “has always been an open approach to invest in alternatives”. Investments in alternatives by Dutch institutional and retail investors, he adds, are therefore relatively high compared with other countries. “The fact that the Netherlands has moved so quickly with the AIFMD has been beneficial for its image,” says Baak, adding that in other countries, such as Italy, nothing important has yet been done. “It is an important topic for managers to choose a domicile as it increasingly influences their asset raising activities,” he says. When marketing the Netherlands as a fund domicile, locals also point to the fact that the country has some of the largest asset management companies in Europe, one of the biggest pension funds and well-known insurance companies. “The Netherlands is also a stable country, more than others that were affected by the eurozone crisis,” he adds. “We had one pension fund that did not want to invest in an Irish fund we were planning to set up because it is one of the PIIGS [the debt-ridden countries of Portugal, Ireland, Italy, Greece and Spain].” Ian Headon is senior vice president, product management, at Northern Trust, and chair of the Irish Funds Industry Association AIFMD taskforce. Despite not having the first-mover advantage, Headon says Ireland will have a competitive edge over other domiciles because of its hedge fund prominence. “Ireland provides not only hedge fund administration for funds domiciled in Ireland, but also for those domiciled in the US, the UK and Switzerland, or outside Europe, in the British Virgin Islands, Cayman Islands or Bermuda,” he says. Headon says it is “not a race” to transpose the AIFMD into law and other factors, such as regulation, supervision and human capital, are also important. Michael Fergusson, co-chair of the Association of the Luxembourg Fund Industry’s hedge fund sub-committee, says Luxembourg will play an ever-increasing role over the coming years both as a domicile and as a servicing centre for hedge funds. “The AIFMD will, over time, create an AIFMD brand for alternatives, including hedge funds, as the Ucits directive did for traditional funds,” he says. “This will drive a cross-border distribution model for alternatives as the Ucits directive did for the traditional classes.” DISTRIBUTION STRATEGY
Fergusson says given Luxembourg’s cross-border market share in the Ucits space and in alternative asset classes such as real estate, Luxembourg is well placed to leverage its know-how and capabilities in cross-border distribution across to AIFMD alternative products. One of the key considerations for those deciding which fund domicile to use, Fergusson says, is how it will impact the distribution strategy. “Luxembourg-domiciled products can access distribution channels that many other domiciled products cannot,” he says. “I also believe the recent enhanced tool book of regulatory initiatives announced by the Luxembourg government, including the creation of an Anglo-style legal partnership, and specific measures on carried interest will further reinforce Luxembourg’s position as a highly competitive fund domicile.” Siemers says the cost of redomicilation will be a considerable amount, not so much because of the regulatory and adviser fees, but more so because of the time spent by the manager itself. “There is still a lot of work to be done,” he says. “Legal fees can amount up to tens of thousands of euros, but redomiciliation also requires auditors, assurance and other experts. It is difficult to put a number on it.” Headon says he expects a number of investors to be drawn to European fund domiciles because of the benefits of the passport and investor protection. “We expect asset managers to review their choice of domicile,” he says. “The key business questions are if the benefits of distribution through the passport outweigh the compliance cost.” Siemers says redomiciliation from one European domicile to another is less expensive than from offshore to onshore. Fergusson notes that several dedicated hedge fund legal firms and firms offering directorships and related services from the Cayman Islands and London have established operations
in Luxembourg over the past 18 months. Two-thirds of hedge fund managers worldwide are based in the US, Baak says, adding that almost all of them have at least one Cayman fund, a combination that is difficult under AIFMD. “The biggest issue is what will happen to US managers and their Cayman funds,” Baak says. “Many allocators already prefer European structures, even though it is still possible to invest in offshore structures.” Darren Stainrod, chairman at the Cayman Islands Fund Administrator’s Association, says he expects a continued increase in the number of Luxembourg and Dublin funds, but not necessarily at the expense of Cayman-domiciled funds. “This [trend] has been driven by investor preference for more regulated products and managers positioning themselves ahead of the AIFMD,” he says. “We have not seen any managers close their Cayman funds to relocate as the private placement rules actually allow them to continue as before.” The Cayman Islands have been in close dialogue with the European Securities and Markets Authority and the EU, he says, to ensure it is at the forefront of any co-operation agreements. Stainrod adds: “The real test will be the next few years as private placement rules change and third countries become eligible to apply for the passporting.” ©2012 funds europe

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