Are European regulators pushing offshore funds onshore?

Date: Tuesday, August 16, 2011
Author: Joy Dunbar, Hedge Fund Intelligence

Before the global financial crisis in 2008 and the ensuing paradigm shift – about what is safe and unsafe in financial markets – offshore domiciles ruled the roost in alternatives and hedge funds.

Traditional offshore jurisdictions like Cayman and the British Virgin Islands still make it faster, easier and cheaper to launch funds. Permitted investments are also more flexible and varied than their onshore cousins.

I do not want to enter the debate about whether offshore or onshore domiciles are better. But I would like to highlight how the events of the last few years have impacted the decision of assets managers of where to domicile a fund.

Since the credit crunch in 2008 there has perhaps been a perception from some regulators that jurisdictions like Cayman are relatively unregulated and therefore ‘unsafe’. Concerns about hedge fund products have resulted in European regulators writing the Alternative Investment Fund Managers Directive – while the US has implemented the Dodd Frank Act.

Both changes of regulation aim to create the perception of a safer regulatory environment for hedge funds, according to the rhetoric – if not in reality.

There may not be any direct demands for European fund managers to redomicile their funds from their respective regulators. But a growing number of asset managers are offering onshore parallel versions of their offshore funds while other firms, like Marshall Wace, have relocated their entire fund ranges from Cayman to Dublin.

Other anecdotal evidence has come from an increasing number of law firms specialising in fund management opening offices in onshore domiciles like Ireland. Walkers, an offshore specialist law firm, is one of many opening offices or expanding onshore capabilities – I am sure to deal with increasing demand from its offshore clients who are going to Dublin, Luxembourg or other jurisdictions.

There is also a perception among some in the industry that the French regulator in particular has leant on local asset managers to move their fund domiciles onshore following the global financial crisis.

Some commentators have suggested, perhaps cynically, that the Paris-headquartered European Securities and Markets Authority, which is responsible for the stability of the securities markets, may have a strong French influence – which will be protectionist and hard line in its regulatory approach to funds based offshore.

Whether such a perception is fair will perhaps be borne out by the detailed outcomes of some of the rules ESAMA is responsible for, including the review of absolute return UCITS funds that use derivatives (see earlier story), and as Qualifying Investor Funds (QIFs) and Specialized Investment Funds (SIFs) become more popular as a consequence of the AIFMD.

Nevertheless, I believe that funds from Cayman and other offshore jurisdictions will continue thrive – if there is demand from investors and worldwide financial regulators continue to permit asset managers to launch them. 

In the future, once the present has become history, we will be able to assess whether European regulators are really pushing funds onshore – and how successful such a strategy has been. Until then, the shift onshore continues.