Offshore centres still rule for hedge fund managers
A recent survey shows limits to the popularity of Ucits as a way to run hedge funds onshore.
The rise of onshore Ucits-compliant hedge funds at the expense of offshore variants, widely expected as a response to investor pressure for regulated vehicles, has largely failed to materialise.
About three quarters of 49 managers in an RBC Dexia/KPMG survey have not opened onshore mirrors of their offshore products. Of the 24% that have, roughly half (55%) have kept offshore products open – known as co-domiciliation.
About half (49%) of managers had not moved any onshore, nor plan to.
Some practitioners expected a post-crisis surge in demand for onshore as investors responded to offshore funds gating (impossible for Ucits funds), general illiquidity (less likely in Ucits given fortnightly dealing), and fraud (arguably less likely with regulation, although some feeders into Bernard Madoff’s Ponzi scheme were Luxembourg regulated).
The statistics show the move has largely failed to happen. Less than 5% of hedge managers running Ucits III compliant products – homed in centres like Ireland, Luxembourg or Malta – have migrated their entire business onshore, from offshore homes, typically Cayman Islands or British Virgin Islands.
But hedge managers point to a lack of demand for regulated funds.
Investors, meanwhile, may point to performance. Offshore funds made 10.25%, compared to just 1.86% from onshore, according to Hedge Fund Research and Alix Capital. Rob Mirsky, KPMG’s head of hedge funds, said:
“It is notable some of the large hedge fund launches recently have been using offshore vehicles, managers are still using those centres, and they still seem to be popular with investors, too.”
Authors of the KPMG/RBC Dexia study wrote: “The best solution for managers may be to retain offshore funds for investors who prefer and benefit from them, while setting up EU-domiciled funds to address issues from investors who prefer a greater degree of regulation and security.”
Those managers who do come onshore often opt for more flexible non-Ucits structures such as Irish Qualified Investment Funds and Luxembourg’s Specialised Investment Fund, each regulated locally.
Some 77% planning redomicilation intend to use regulated non-Ucits formats.