May 3, 2009 2:05 pm

Ucits looks to gain from hedge woes

Ucits funds could be the great winners of the European Commission’s crackdown on hedge funds.

Brussels last week released highlights of a draft directive on alternative investment fund managers (AIFM), creating a pan-European market for hedge funds.

Registration requirements – for managers with assets over €100m (£89m, $133m) – will allow funds to be marketed in member states to professional clients, defined by the Mifid directive.

Giles Drury, a member of KPMG’s investment management team, says: “A lot of significant hedge fund groups are launching Ucits products.

The vehicle could potentially provide greater access to the mass affluent when the directive comes.”

Ucits funds have proved a growing success with hedge fund managers and traditional fund companies trying their hand at alternative portfolio strategies.

The AIFM directive – planned for introduction in 2011 – has, however, many hurdles to overcome. The text is under negotiation with the Parliament and the Council, and member states are known to have different views over the content of the legislation.

Under pressure from France and Germany, Brussels has introduced a last-minute amendment to its proposal, creating an “EU passport” for offshore funds. Initial drafts pointed to the absence of regulatory barriers for this type of fund.

Funds domiciled in offshore centres, such as the Cayman Islands or the British Virgin Islands, will have “to comply with stringent requirements on regulation, supervision and co-operation, including tax matters”, says the Commission.

There are no details yet on the future requirements for offshore funds. Brussels says that “more time will be needed to do the necessary preparation and groundwork to make this a success”. It plans to introduce the passport in 2014.

Offshore hedge funds can continue to be sold where national regulations permit until the passport is introduced, the Commission adds.

It says: “This will be a strong incentive in the years ahead for jurisdictions and managers concerned to deliver necessary improvements in supervision, co-operation with European supervisors and compliance with the Organisation for Economic Co-operation and Development’s tax code.

“This approach is consistent with the objectives of the G20 to enhance transparency and the quality of regulation in offshore financial centres,” says Jarkko Syyrilä, director of international relations at the Investment Management Association.

“If the directive comes to fruition, EU-authorised AIFMs will be able to distribute both EU and non-EU-domiciled funds to professional investors in any member state. These changes to the rules will offer more choice for Europe’s professional investors and further strengthen Europe’s fund management industry.

“However, waiting another three years until non-EU-country funds can be distributed in Europe is too long.”

The Commission says the three years are needed to allow the EU to check whether the necessary guarantees are in place in the countries where the funds are domiciled.

Mr Drury, from KPMG, believes the Commission’s requirements for offshore funds will “encourage” centres to implement the OECD’s tax code. The Cayman Islands and the British Virgin Islands are among the tax havens that are still in breach of the standards.

However, others believe the requirements for offshore funds will drive international hedge fund managers away from Europe.

The Commission says AIFMs will have to provide detailed information on the characteristics of the fund and governance of the management companies. They will have to disclose arrangements regarding risk management, valuation and safe-keeping of assets, and will be required to hold and retain a minimum level of capital.

The alternative investment industry – angered by the proposals – says it will push for changes to the directive.

Florence Lombard, executive director at hedge fund association Aima, says: “The unintended consequences of these measures may put thousands of jobs in several major European industries under threat and slow down any economic recovery.

“Additionally, many of the provisions will disadvantage European hedge fund managers against those outside of Europe, which could prove an incentive for them to move business elsewhere – negatively impacting badly needed tax revenues for member states.”

Charlie McCreevy, commissioner for the EU’s internal market and services, says: “It is essential that regulators have the right information and tools necessary to conduct effective macro-prudential oversight.

“I look forward to working with the European Parliament and Council to secure the adoption of this important piece of legislation.”

Baptiste Aboulian is a reporter for Ignites Europe, a Financial Times publication, where this article first appeared

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