Hedge fund managers will continue to offer EU-domiciled versions of their offshore funds but may opt for QIFs or SIFs rather than UCITS funds, according to a new RBC Dexia/KPMG report.
Of the managers surveyed, 27% said they were considering creating EU-regulated funds while 24% had already brought offshore funds onshore. Of those, 55% had opted for co-domiciliation by creating onshore clone funds to complement their existing offshore offerings. Less than 5% of those with onshore funds said they had decided to transfer the domicile of their funds to the EU outright.
Jean-Michel Loehr, chief of industry and government relations at RBC Dexia, said: "The survey shows that EU fund domiciles are becoming more and more relevant to the hedge fund community, and that they respond to a real need amongst clients for more liquidity and transparency. Co-domiciliation allows hedge fund managers to cater to investors that are not authorized to buy into Cayman funds with onshore products while retaining their existing offshore strategies."
The future of co-domiciliation seems to be tied to the AIFM Directive (EU regulations for alternative investment managers). Most hedge fund managers who said they’d consider domiciling a fund in the EU said they would do so before the directive was implemented in 2013 while 69% said they were considering doing so by transferring the domicile of their existing funds to the EU.
The report also shows the bloom may be off the rose for the UCITS framework. Whereas. in past surveys, hedge fund managers were as likely to consider setting up a UCITS fund as an Irish QIF or a Luxembourg SIF, the current study shows 77% of those considering onshore structures prefer QIFs or SIFs.
Tom Brown, KPMG head of investment management for the EMEA region, said: "The market is starting to realize that even though 90% of alternative strategies can be replicated under UCITS, specialized structures such as SIFs and QIFs offer more flexible liquidity and transparency rules for hedge funds. UCITS still offers very robust protection for investors, but clearly the wholesale shift into alternative UCITS some had been predicting has not taken place."