ALFI European Alternative Investment Funds Conference - a summary

Here is a summary of some of the key issues at the Association of the Luxembourg Funds Industry (ALFI) alternative investment conference.

  • The Alternative Investment Fund Managers Directive (AIFMD) has facilitated a substantial increase in onshore funds with Luxembourg and Ireland (courtesy of its track record as a major provider of hedge fund administration) being the main beneficiaries. A study published at the conference by ALFI and Oliver Wyman indicated offshore domiciles including Cayman (for hedge funds) and Delaware (for private equity) had retained their market share but other jurisdictions including the Channel Islands, Bermuda and the British Virgin Islands (BVI) had lost market share. Malta is rapidly emerging as an onshore domicile for smaller sub-$20 million AIFMs, added the report.
  • The approach by EU managers towards AIFMD is far more proactive and engaging than non-EU firms. While US managers continue to believe they can rely on the concept of reverse solicitation, EU firms have adopted a pragmatic approach and recognise that given the dwindling supply of institutional investor capital, non-compliance with AIFMD does not make economic sense. A number of conservative investors – such as German pension funds – are increasingly demanding their managers be AIFMD compliant.
  • Poland has yet to transpose AIFMD although one lawyer said this was down to intransience of the local Polish regulator. A Polish service provider said it was merely inefficiency. This means Polish funds cannot market to the rest of the EU.
  • Latin America, particularly Chile, continues to be a source of capital for UCITS. Chilean pensions are the most robust in Latin America and Luxembourg has benefited from Ireland’s misfortune as Chilean pension plans were briefly prohibited from investing in Irish domiciled funds because of the country’s suboptimal credit rating. While this ban has been rescinded, Luxembourg has benefited. A number of Chilean pensions have also expressed an interest in investing in AIFMs. Brazils institutional investor base, which has historically been very domestically focused in terms of asset manager selection, is increasingly looking to invest in UCITS. However, this is subject to regulatory restrictions, although people are confident this will change.
  • There is scepticism as to whether there will be a UCITS VI. One executive said Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), had told financial institutions not to get ahead of themselves on UCITS VI, adding the proposal was merely a consultation exercise. The executive said much of what was being discussed in UCITS VI was actually being implemented now, such as money market fund and exchange traded fund reforms. The UCITS VI consultation asked for public comment on the eligibility of assets permitted within UCITS, although regulators have notably clamped down on commodity trading advisors (CTAs) adopting UCITS already. If there is no UCITS VI, there are questions as to when or if the EU will introduce a pan-EU depositary passport. If there is no pan-EU depositary passport, there is a risk there could be no uniform laws governing depositaries servicing both AIFMs and UCITS on discharge of liability. In other words, depositaries servicing AIFMs will be allowed to continue to discharge liability to sub-custodians while UCITS depositaries will not.
  • A panel on activist investing, which has generated neat returns and profits, stirred debate. The US approach, which tends to be more aggressive, is not making many friends in Europe, where the approach to activist investing is more conciliatory with a stronger emphasis on compromise and engagement.  US laws are also more favourable to shareholder activism than in the EU, where varying national laws can make it difficult to turn around distressed or failing companies.
  • There is concern whether UCITS and AIFMs will be allowed to transact in China A Shares through the recently unveiled Shanghai-Hong Kong Stock Connect initiative. If foreign managers are to access Chinese markets, local laws require them to enter into a strategic partnership with a mainland financial institution, and there is uncertainty as to whether this partner organisation should be defined as an agent bank or Central Securities Depository (CSD) under EU rules. This is causing a number of challenges insofar that it is very difficult (according to some European regulators) to differentiate between a CSD and agent bank in China. The latter point matters because if the assets are held in a CSD, it can be held in an omnibus account and the depositary can absolve itself of the strict liability. If the assets are held in an agent bank (as defined by the EU), the depositary must ensure AIF assets are segregated from non-AIF assets, and there are question marks as to how far discharge of liability or indemnifications against errors or mistakes can go.  For this reason, the Commission de Surveillance du Secteur Financier (CSSF), the regulator in Luxembourg, has prohibited AIFMs and UCITS from engaging in Shanghai-Hong Kong Stock Connect directly, but it is likely that the CSSF, given the reasonable market demand for China A Shares, will capitulate and permit AIFMs and UCITS to access the Chinese market. 
Tags: ALFIHedge FundsAIFMDUCITSRegulationLuxembourgCSSF