Multifonds Keith Hale asks: Will AIFMD succeed in attracting business to Europe?
Keith Hale, executive vice president Client and Business Development at Multifonds has outlined the arguments for and against AIFMD actually leading to more European business in alternative investment funds.
In an industry survey conducted by Multifonds last year, 63% of respondents, with combined assets exceeding $16trn, thought that AIFMD would make Europe a more attractive jurisdiction for alternative fund investors. With the introduction of AIFMD, alternative investment fund managers will be able to market their funds across European markets more easily, potentially making Europe a more attractive venue for non-EU hedge funds. But as the AIFMD July deadline draws closer, the realities of implementation are now becoming clearer. There is a real potential downside that if the additional costs of implementing AIFMD are detrimentally high, then we may see the opposite effect, with AIFMD taking business from Europe and funds choosing to domicile outside Europe to avoid additional regulatory costs.
AIFMD offers a potential avenue for gathering assets for alternative funds. Fund managers will be able to establish AIFs (alternative investment funds) to attract investment which previously came directly from high net worth end investors or via an alternative Ucits distribution structure. An AIF structure will give distribution capabilities similar to a Ucits structure, but without the same limitations on eligible asset and risk controls. This will give non-EU alternative funds more opportunities to market their funds across Europe. This assumption was supported by our survey findings, where 72% of respondents agreed that non-EU managers would set up European operations to take advantage of AIFMD.
As the deadline for AIFMD looms, the various European jurisdictions are vying for position. Early starters, such as the Netherlands, were the first to adopt AIFMD, but it is our belief that the long-established centers for fund administration (Ireland and Luxembourg), will be the ones that benefit most. The real trick for all of these jurisdictions will be to bring the efficiency associated with traditional funds together with the flexibility associated with hedge funds, in terms of asset classes, structures and performance/incentive fees.
Increasing institutional investor allocation to hedge funds and growth in retail absolute-return funds such as alternative Ucits, combined with AIFMD, are causing convergence between the traditional long-only and the hedge fund market. For example, investors in hedge funds may want daily liquidity and Ucits-levels of risk management; conversely, retail funds may take on alternative characteristics like a long-short strategy, more derivative instruments or performance fees.
Across our client base, we are seeing evidence of this convergence, with significant growth in alternatives over the last few years to complement our market position in Ucits funds. For example, of the $165bn of offshore-domiciled funds (Cayman, Bermuda, BVI funds) now on the Multifonds investor platform, $50bn are performance fee equalization, series or limited partnership assets (and these assets are due to rise by 200% in the next year).