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.
Ireland, in our view, is well positioned for alternatives given its position as the leading domicile for alternative funds in the European Union. The qualified investor funds (QIFs) vehicle used by many funds and administrators for funds domiciled in Ireland will become the basis for AIFs. The Irish government appears to be encouraging the industry to grow, by adapting and introducing legislation to attract further alternative investment activity. The Central Bank of Ireland (CBI) is attempting to leverage existing regulation, such as the QIF structure, to optimize the EU regulation requirements laid out in the AIFMD, and the recently released CBI handbook gives managers advice when seeking authorization in Ireland. As a recognized fund center for alternatives, and with an extensive track record of Ucits distribution, Ireland should be well positioned and an obvious choice for funds choosing to re-domicile to an onshore location for new business growth.
Luxembourg is also well positioned as one of the major onshore European domiciles for alternatives. It is well established as the leading Ucits domicile and recognized as having a strong distribution network, particularly in the retail market. However, Luxembourg will need more than distribution strength alone to guarantee the growth of Luxembourg-domiciled AIFs. The real challenge for Luxembourg will be to bring together efficiency and flexibility whilst keeping costs low to prevent new funds going to other cheaper jurisdictions. As a result, the systematic automation of the AIF operating model via efficient processing systems is critical to the success of Luxembourg for AIFs and indeed as a Ucits center.
Until AIFMD comes into law, we will have to wait and see whether it will indeed succeed in bringing the predicted new inflow of alternatives business to Europe and attracting it away from the well-established offshore domiciles. But the potential downside for Europe is that if the cost of the new regulation in European jurisdictions is too high for fund managers, they may well choose re-domicile their funds offshore, outside Europe, to reduce costs.
Early indications from our ongoing research since the Level 2 text was released suggests that costs for implementing AIFMD are higher than previously anticipated, although there is still a lack of certainty over what the final costs will be. For example, the biggest concern identified in our survey was depositary liability (57% saw depositary liability as the most challenging element of the Directive), which could add anywhere from 1bp to over 100bp, depending on levels of liability. In that scenario, it is very unlikely with the current levels of low interest rates and returns that a ‘2 and 20′ fund becoming a ‘3 and 20′ would be a very attractive proposition. Of course, if a fund re-domiciled outside Europe, it couldn’t be officially marketed to European investors, but then many hedge funds never ‘marketed’ their funds to European investors in the first place.