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Thursday, 25th April 2024 |
| Dublin starts to see growth in hedge fund management |
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| While European hedge fund mangers are predominantly located in London, centres such as Dublin, Paris and Milan are starting to see an increase in managers moving in write Jacinta Byrne and Aidan Conlon. One example is Vega Asset Management, a US hedge fund manager which opened its doors in Dublin in recent months. |
In recent times, the hedge funds industry in Europe has experienced tremendous growth with European hedge fund assets currently estimated at over $84 billion (Eurohedge: Feb 2003). Historically, European regulations have restricted investment in hedge funds to a limited number of qualified sophisticated investors. However an increasing appetite from smaller investors and institutional investors such as pension funds and life insurers who want to invest in more regulated diversified products has resulted in a growing number of EU domiciled hedge funds, including funds of hedge funds. The EU domicile has proved more attractive to those investors than the traditional offshore jurisdictions.
Hedge fund investment managers
The numbers of hedge fund investment managers are growing in Paris, Frankfurt, Stockholm, Milan and Dublin but are still predominantly located in London. The majority of European hedge funds are managed out of London, even though the UK does not yet have a locally domiciled hedge fund vehicle and has tended to favour using the traditional offshore vehicles. However there has been an increase in the number of single manager funds managed from France, Switzerland, Sweden and Ireland in recent years.
Most European countries do not have specific regulations for hedge fund managers and consequently they have to comply with the same regulations applicable to conventional fund managers located in that country. The minimum capital requirement for a fund manager in most countries is a fixed amount (varies from country to country) except for the UK, France, Guernsey and the Isle of Man, where capital requirements vary based on the manager’s annualised expense base. The revision to the European Capital Adequacy Directive may lead to increased capital requirements for hedge fund managers.
Hedge fund products
Traditionally single-manager hedge funds have only been available to institutional investors or high net worth individuals. Some European regulators have created locally domiciled single-manager hedge funds e.g. Ireland, Italy, Luxembourg, and most recently, Germany with the regulators setting a limit on the minimum investment amounts, thereby limiting access of smaller investors and offering a form of ‘protection through prevention’.
These European domiciled hedge fund products are growing with France, Ireland, Italy, Luxembourg, and Sweden all permitting the formation of domestic, single manager hedge funds and/or fund of hedge funds, due to recent legislation. These funds are more highly regulated than products domiciled ‘offshore’, with regulations governing minimum subscription amounts, minimum fund sizes and portfolio investment restrictions.
Reviewing the EU landscape, the main centres for domiciling hedge funds are as follow:
• Ireland: Single manager hedge funds have been permitted under the regulations in Ireland since 1990 as Professional Investor Funds (PIFs) and Qualifying Investor Funds (QIFs) with minimum investment amounts of •125,000 and •250,000 respectively. QIFs have no investment restrictions and have no limits on leverage. In 2000 the use of prime brokers by Irish funds was permitted with certain restrictions being imposed to afford a higher level of investor protection than ‘offshore’ funds. Currently there is a proposal for the revision of the rules governing the use of prime brokers to give hedge funds more flexibility. Revised regulations were issued in December 2002 permitting the formation of Irish authorised retail fund of hedge funds (minimum subscription •12,500). Investee funds (of the fund of the funds) can be unregulated schemes (no restriction on domicile); however there are restrictions on the percentage of assets of a fund that can be in unregulated schemes, and various criteria apply to the underlying fund.
• Luxembourg: In Luxembourg single-manager hedge funds investing mainly in derivatives have been permitted since 1991. CSSF circular 02/80, issued in 2002, allows for the formation of single-manager hedge funds investing in transferable securities, using leverage and short selling, as well as funds of hedge funds. There are restrictions over the percentage of assets of the fund that can be in any single underlying scheme. To maintain a level of flexibility there are no minimum investment amounts and funds are authorised on a case-by-case basis.
• France: Retail funds of hedge funds products will be permitted in France once the regulations outlined in the COB statement of position of 3 April 2003 are implemented later this year. The COB has defined specific criteria that should be satisfied by investee funds, such as the legal environment of the fund and the control over the assets, and non-European domiciled invested funds are permitted. The minimum investment permitted is •10,000 and the minimum fund size is •160,000.
• Germany: In Germany a draft bill was published dated 8 July 2003 on the regulation of domestic hedge funds for the first time in Germany, which has yet to pass the parliamentary process. (effective 1 January 2004). Regulated domestic single manager hedge funds will be permitted to short sell and have no limit on leverage. They may have a maximum of 30 investors who are not ‘natural persons’, therefore available only to institutional investors. The regulated domestic hedge fund of funds may be marketed publicly to retail investors with no minimum subscription amounts. Target funds (i.e. investee funds) are not limited to German or EU domiciled single hedge funds, however the fund must hold at least five target funds, and various criteria apply to the target funds.
• Italy: During 2002, the first domestic hedge funds launched in Italy. In April 2003, the minimum subscription into Italian domestic domiciled hedge funds was decreased from •1,000,000 to •500,000, thus prohibiting investment from the public, and the maximum number of investors in a fund has been raised from 100 to 200. Currently there is pressure on the regulators to reduce the limit further to •250,000.
• Switzerland: Due to limited investor demand and regulatory restrictions in respect of borrowing, there is currently only one single manager hedge fund domiciled in Switzerland. Fund of hedge funds are often set up as open-ended regulated investment funds or as close-ended non- regulated investment companies, usually listed. Both of these structures can invest in offshore single manager hedge funds. There are no minimum investment amounts. A current review of overall funds legislation is taking place and the non-regulated investment companies will be included in the scope of the new regulations.
• Sweden: In Sweden, investment in single manager hedge funds will be restricted to qualified private investors with a minimum investment of SEK 500,000, with new legislation coming into effect in February 2004. Private individuals will, however, be permitted to invest in fund of hedge funds which invest in at least 5 other hedge funds.
• United Kingdom: The Financial Services Authority (FSA) in the U.K issued a consultation paper in May 2003 proposing a new set of regulations for UK authorised collective investment schemes. These proposals include for the first time, ‘a lighter touch’ product regulation regime for funds that are intended for institutional and sophisticated investors, which may be suitable for certain types of UK domiciled authorised hedge funds. The FSA expects to introduce final fund rules in early 2004 (with a transitional period up until 2007). However in March 2003, the FSA have stated that it would be premature to offer any type of hedge fund (including fund of hedge funds) to retail investors.
It has been well documented that investors, both institutional and retail, are seeking to diversify their holdings beyond the traditional asset classes. Although this option has been open to institutional investors via unregulated products for a number of years, these investors are now seeking to invest in regulated hedge funds. Also pressure from retail investors has led to regulators in Europe creating an environment for hedge fund products. Ireland, Luxembourg, Italy, France, Germany and Sweden have been taking the lead.
UCITS III is due to be reviewed by the EU regulators in 2005 and it is likely that hedge funds will be on the agenda. The developments in retail hedge funds in Europe by that stage will influence whether hedge funds will ever attain the ‘holy grail’ - the European UCITS passport. |
Jacinta Byrne is a manager in the investment management group and Aidan Conlon is a manager in regulatory advisory services at PricewaterhouseCoopers.
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| Article appeared in the September 2003 issue.
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