Luxembourg to capture the re-dom trade
New regulations from the G20, accounting authorities and governments have raised the issue of re-domiciliation as investment managers search for efficient homes for their funds
Re-domiciliation is a rapidly growing challenge for fund managers and Luxembourg is making a strong bid to become the most popular new home for the funds, touting the stability and pragmatic partnership the jurisdiction offers.
Fund management and private banking contributes one third of the state’s GDP. Says Luc Frieden, Luxembourg Finance minister: “We change laws in close consultation with the private sector. This… will help Luxembourg survive better than others.”
An investment fund is re-domiciled when it changes its country of origin. According to data from Luxembourg, some 31% of re-domiciled funds globally have picked it as their new home. Hong Kong is the next most popular destination, taking 17% of the market, with 11% moving to the Cayman Islands, although 50% of all funds re-domiciled are moving out of the Cayman Islands.
The remaining funds originate from a number of countries (Guernsey, British Virgin Islands, Ireland, Bermuda and Luxembourg) with no one country representing more than 8% of the total.
The re-domiciliation trend is likely to accelerate as global financial regulation increases. “There are many ways to re-domicile a fund and the regulations of Luxembourg mean that nearly all situations can be accommodated,” noted Jerome Wigny, partner at law firm Elvinger, Hoss & Prussen.
Noel Fessey, managing director of Schroders Investment Management (Lux) S.A says the local pool of skilled knowledge at reasonable cost is a strong draw. “With our global staff, the small Luxembourg office has become the hub of Schroders’ global business-to-business distribution network.”
Meanwhile, the implications of the EU’s proposed Alternative Investment Fund Management Directive (AIFM) are still uncertain. “Luxembourg is waiting for the final AIFM provisions and will then work with big EU countries to meet requirements but avoid building walls,” commented Claude Kremer, Chairman of the Luxembourg Funds Association.
Frieden noted that in the past Luxembourg has moved quickly to implement legislation in consultation with private business. He aims to legislate for AIFM requirements as soon as possible after the final vote in July, and ideally by the year end. The local funds industry has concerns over AIFM, but echoes the government’s pragmatism. Wigny at Elvinger, Hoss & Prussen said the process has been frustrating because the original draft was so poor. “We are not in favour of AIFM but whatever decision comes we will be ready,” he added.
UCITS brand grows
The jurisdiction is still enjoying strong growth of its UCITS (Undertakings for Collective Investments in Transferable Securities) products, with some €5.5trn under management at end March, representing 76% of the European investment market, according to EFAMA, the European Fund and Asset Management Association.
Luxembourg and Ireland represent the UCTIS brand internationally, as most other EU countries distribute their UCITS funds domestically. UCITS’ biggest markets now are in Asia, Middle East and Latin America. “Initially, UCITS enabled Europe to break into Asia, but now it is about Asia in Europe,” said Kremer. “UCITS brand means safe, reliable, transparent, cost efficient.”
Minister Frieden highlights China as “a very important future development target for the Luxembourg economy and fund industry”. Luxembourg Financial Corporation’s is set to open a Hong Kong office this year, its first permanent international office.
The new UCITS IV guidelines are intended to provide for more efficient fund management and streamlined regulatory requirements. UCITS IV regulations must be legislated in member country law by July 2011. They offer the chance for scale savings via a management company passport , a cross-border merger framework and a master-feeder structure. Cross-country regulation will be speeded up with the new key investor information documents and intra-regulator notification.
Competition for cross border investments is increasing, notably from Malta, Poland, France and the UK, according to Charles Muller, deputy director general of ALFI. He welcomes new competition but believes Luxembourg is well placed to continue to add 1% annually to its current 30% market share.