Offshore Hedge Funds Finding Alternatives to UCITs

June 13, 2011

Hedge fund managers will continue to create clones of their offshore funds in EU-domiciled locations, but more managers are finding alternatives to the UCITs framework. That’s the conclusion of a recent survey released by RBC Dexia and KPMG.

In addition to UCITs, Ireland offers a range of non-UCIT regulated funds that provide greater flexibility for investors, such as the Qualifying Investor Fund or QIF. The main advantage of a QIF is the removal of the Financial Regulator’s general conditions relating to investment policies and borrowing, enabling sophisticated investors to use this structure for a wide range of investment purposes, particularly alternative investments, according to the Irish Funds Industry Association.

In addition, Specialized Investment Funds, or SIFs, were introduced by the Luxembourg government in 2007. A SIF is a flexible instrument allowing private funds, family firms, pension pooling or hedge funds to hold their own investment fund. A SIF can invest in any financial instrument, real estate property, hedge fund, private equity, funds etc.

According to the RBC Dexia and KPMG survey, only about a quarter of offshore hedge fund managers said that they have already brought funds onshore to EU jurisdictions. But more than half say they’ve chosen “co-domiciliation” by creating an onshore “clone” fund to complement their existing Cayman Islands or offshore funds.

Looming over the horizon however, is the possibility of a new set of regulations for EU-domiciled funds. In May, EU finance ministers sent a draft of a new Alternative Investment Fund Managers (AIFM) Directive to the European Parliament. The new AIFM Directive offers the possibility of a “passport” that would enable authorized third-country funds to sell their wares throughout the EU. But it would ban EU investors from placing money with offshore funds that do not meet European rules, according to the Economist.

As a result, the RBC Dexia and KPMG survey shows that 69% of hedge fund managers would consider switching the domicile of their funds to the EU before the new AIFM hedge fund regulations potentially becomes law in 2013.

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