Luxembourg boosts its appeal to hedge funds
More regulation from the European Commission and investor demand for transparency is driving Luxembourg’s attractiveness to hedge funds, giving the industry an alternative domicile to Ireland.
Luxembourg is not typically considered the home of hedge funds, but as demand for greater transparency has increased, so too has the need for many of them to adapt to a more regulated environment.
European Member States have to implement Level Two of the Alternative Investment Fund Managers Directive (AIFMD) by July. It will mark the second stage in an overhaul of hedge funds, private equity funds and real estate funds, set to continue until the entire directive is finally implemented in 2013.
Like it or not, hedge funds will be forced to adapt to the changes, and some are actively seeking a more regulated structure in anticipation of the inevitable.
Luxembourg today plays host to half the alternative Ucits market (hedge funds, private equity and real estate). It holds the largest single share of 50%, followed by Ireland with 25%, France 11%, and the UK with 7%.
Greater regulation from the EU is prompting managers to look at alternative Ucits, while end investors themselves are driving the movement. “Funds are looking at what Ucits is, and why it should be taken seriously,” says Christopher Day, director at Merchant Funds, the promoter and investment manager arm of London-based Merchant Capital.
Data shows interest in the investment vehicle is growing. In 2010, alternative Ucits fund flows rose significantly, capturing more than €6bn of new funds.
They gained more new flows than unregulated hedge funds launched that year, in spite of reports claiming a latent wariness of Ucits among many managers and investors. With the growth of interest in Ucits hedge funds, so too Luxembourg is growing its appeal as an alternative domicile. Luxembourg has always been ahead of the curve with Ucits: it was the first EU Member State to pass Ucits IV through its Parliament on 16 December 2010. But traditionally, Ireland is considered the more natural domicile for hedge funds in Europe.
“Ireland will always be seen as an efficient hedge fund centre, Luxembourg is seen more and more as an alternative,” argues Didier Prime, asset management leader and audit partner at PwC Luxembourg.