Product Options
U.S. fund managers looking to attract European investors, who represent a significant amount of investor assets, should understand that these investors typically prefer to invest in European regulated products. The preference for European regulated products is partly based on the perception that the addition of a custodian/depository coupled with the increased regulatory oversight may decrease the risk of a substantial fraud or even negate the effects should one arise.
Of course, being able to provide these benefits to investors preferring a European product means that managers will be exposed to new challenges such as increased compliance, monitoring and reporting, which add to costs in an age where management fees are being challenged and cost management is a priority focus. Admittedly, potential increased reporting to a second or third regulator coupled with increased costs can be off-putting when considering global distribution.
But the current global landscape and expectations indicate that managers looking to grow their assets under management need to transverse a number of regulators and consider different products to attract a global investor’s base. If done well, costs can be managed and profits realized.
UCITS
The Undertaking for Collective Investments in Transferable Securities (UCITS) offers distributable product across the E.U. Initially, the UCITS structure was developed and envisaged as a mutual fund directive; however it has been adopted by hedge fund managers because it provides investors a recognizable mark of quality that the market needed post 2008. The success of the product is illustrated by many statistics, including the fact that 70% of funds publically distributed in Asia are UCITS and the growth of combined UCITS assets under management (AUM).
So what’s the potential downside? First, many hedge fund managers have found that their strategy does not fit within the UCITS framework or needs significant alternation to meet the portfolio guidelines, liquidity terms and significant upfront costs to name a few. Where a strategy does fit, the UCITS brand is worth considering due to recognized brand/quality market perception.
AIFMDs
Where a strategy does not fit, hedge fund managers may now be able to fully replicate their strategies in a dedicated hedge fund product under the Alternative Investment Fund Manager Directive (AIFMD). AIFMD was developed as the hedge fund equivalent of the UCITS and provides a strong alternative where a UCITS does not meet the objectives and needs.
QIFs and SIFs
These alternative funds are overseen by the same regulatory framework as UCITS. The Qualifying Investor Fund (QIF) is regulated by the Irish Financial Regulator and the Specialised Investor Fund (SIF) by the CSSF in Luxembourg. Increasingly, the majority of hedge fund managers are launching alternative funds under the QIF and SIF brands than under UCITS. We expect this trend to continue since funds established under the European directive meet the requirements of and are overseen by local regulators while giving managers a lower cost option that restricts their strategy less.
Distribution Options
By allying a European fund with the existing Cayman Master Feeder structure, a manager can create a suite of products that attract U.S. onshore, U.S. tax exempt, European, Asian, Latin American and Australian investors.
While structures can evolve in any number of ways, here are two basic options:
The first model assumes that most U.S.-based managers have U.S. limited partnerships which are utilized due to their tax advantages for U.S. taxable investors.
For a significant percentage of alternative managers in the U.S., the addition of a Cayman fund facilitated access for U.S. tax exempt investors, institutional investors as well as European High Net Worth Individuals (HNWI’s).
As such, managers who can replicate (marginally amended or otherwise) their strategy in a UCITS fund will help gain access to European pension plans, institutions and Asian investors that may otherwise be inaccessible.
For the alternative managers that are unable to access the European, Asian and Latin American investors yet whose strategies do not fit into a UCITS, the implementation of AIFMD creates a great alternate through the QIF or SIF, which are being referred to as the ‘Alternative UCITS’.
When AIFMD is fully implemented, non European managers will be prohibited from marketing their offshore product to European investors.
While the world is flat, capital raising doesn’t have to be limited to one jurisdiction as a result of not having the right structure or products. In light of the pending restrictions on non-European based investment managers under AIFMD, it’s important to be aware of European products, capital raising opportunities and limitations with European and other international investors.
Derek Delaney is Managing Director of DMS Offshore Investment Services (Europe) Limited and Global Head of Business Development for dms Fund Governance Ltd. He can be reached at ddelaney@dmsoffshore.com.
