By John Hamrock -- Thanks to Ireland’s dedication to providing cost-effective, efficient and highly skilled fund administration, its global reputation as a leader in international investment management continues to expand. Clearly, recent events have required hedge funds to question existing business models and investors to increasingly seek greater transparency. This increased scrutiny has furthered Ireland’s strong industry position. With €1.4 trillion in total assets under administration, half of which is comprised of hedge fund administration, Ireland continues to demonstrate its strength and future potential.
Evidence of Ireland’s growth includes the recently announced joint venture between Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch, which are launching 13 exchange-traded funds and 22 exchange-traded commodity funds domiciled in Ireland.
For U.S. traditional and alternative fund managers, Ireland represents a gateway for exporting advisory services outside the States. U.S. mutual funds have distinct tax disadvantages when sold to non-U.S. investors whereas European registered mutual funds, also known as Undertakings for Collective Investments in Transferable Securities (UCITS) offer greater tax efficiencies when sold worldwide. Ireland enables U.S. fund managers to establish themselves within the EU regulatory regime in order to tailor products to meet the needs of global investors. Investors, in turn, increasingly benefit from access to more tax competitive products and the added transparency offered by Ireland’s regulated environment.
“2009 will be the year of the regulated investment product,” states Gary Palmer, chief executive officer of the Irish Funds Industry Association. “In particular, new fund start ups are feeling increasing pressure from investors seeking more risk averse products and regulated jurisdictions. These funds need the best possible solutions for transparent fund structures, multiple liquidity options, all with cost efficiencies and technology.”
As Ireland expands its reputation and stature as a “fund center of choice” it is helpful to understand its history as a fund center, examine current product choices, and outline what the future may hold for the country.
Ireland’s regulatory regime has always viewed investor protection as a priority while recognizing the importance that hedge funds place on quick market access. To reassure investors and ensure that there are no delays in hedge fund products reaching the market, Ireland introduced the Qualifying Investor Fund (QIF) to balance meaningful oversight with flexibility. QIFs are authorized and regulated by the Irish Financial Regulator, and all parties to the fund must also be similarly authorized and regulated, including custodians, trustees and prime brokers.
In addition to being a leading hedge fund administration centre, Ireland is home to many large global banks, asset management providers, and blue chip service providers. The Irish Stock Exchange is a global leader in the listing of funds and it is also interesting to note that Ireland recently signed a memorandum of understanding with China, thus opening the Chinese market to the distribution of Irish funds. There are numerous tax advantages for funds registered in Ireland such as no tax on income or capital gains within the fund. A range of double taxation treaties with countries around the globe exist and there is no taxe d’abonnement such as that imposed in Luxembourg.
With more than 20 years’ experience as a fund administration centre, Ireland offers a broad platform of product choices including UCITS. Ireland is one of the leaders in Europe for UCITS funds, which offer a robust and consistent level of investor protection and regulatory compliance with a high level of acceptance by regulators worldwide. They can be marketed globally to both retail and institutional investors as a harmonized European retail product (but not exclusively retail).
“These products will allow us to continue to serve our clients’ ever expanding needs across all spectrums of their businesses as well as open new distribution opportunities for Delaware,” said Christopher McCarthy, co-head of Global Sub-Advisory Sales and Services for Delaware Investments.
In spite of the difficult markets in 2008, the UCITS brand is widely recognized and the product is distributed in over 140 countries. UCITS are transparent, and governed by tried and tested regulation with a focus on risk management and investor protection. UCITS III has brought flexibility to accommodate alternative strategies utilizing leverage and short exposure. UCITS have continually evolved to meet changing market demands through the implementation of UCITS III and the introduction of UCITS IV (estimated implementation by 2011).
(Source: EFAMA and IFIA)
The above graph shows the growth of assets in European domiciled UCITS from €3 trillion in 1998 to €7.9 trillion through 2007. The drop in assets in 2008 to €6.1 trillion was due to the combination of market depreciation coupled with net redemptions.
On 30 April, 2009 the European Commission issued a new draft Directive on Alternative Investment Fund Managers. In this Directive, alternative investment funds are defined as any collective investment undertaking, which is not a UCITS, and so could include hedge funds, funds of hedge funds, private equity funds, real estate funds, infrastructure funds, and non-UCITS retail funds.
This directive will impose additional costs on managers in terms of requiring them to hold additional capital, implement complex new fund reporting and risk management systems. Although, there appears to be a more direct impact on the UK hedge fund management industry than on the Irish fund servicing industry, as a well regulated jurisdiction, the Irish fund administration industry will analyze the new directive in great detail and work closely with hedge fund manager clients to help adapt to the new directive as efficiently and seamlessly as possible – this directive, coupled with the harsher tax regime in the UK may lead alternative investment managers to give serious consideration to establishing in Ireland.
Clearly, Ireland is well-positioned to move up the value chain from fund administration to security analysis, trading, and portfolio management. Government agencies such as the Industrial Development Agency (IDA Ireland) and Enterprise Ireland are devoting significant resources to attract asset management companies to establish a presence in Ireland. The Government and industry are working together to build a world class third level academic institution dedicated to offering advanced degrees in security analysis and portfolio management. There are also a growing number of professionals in Ireland who have attained chartered financial analyst (CFA) qualifications.
Additionally, Ireland has a strong global reputation in technology with companies like Intel and Hewlett Packard long established on its shores that may be leveraged for the asset management industry. Quant shops, for example, utilize significant technology in managing index and enhanced index portfolios. There are several administrative services affiliates of these large global index managers already present in Ireland with companies such as State Street, Northern Trust, and Société Générale represented. Ireland has already attracted some leading global asset managers to Dublin with leading firms such as Pioneer Investments, KBC Asset Management and Mercer Global Investments.
The benefits of domiciling funds in Ireland continue to garner attention as the country continues to adapt its cost base quickly to make it more competitive on the global investment playing field. Indeed, the country has accomplished a good deal this past year in terms of reputational credibility. Ireland’s future looks bright.
John Hamrock is a Member of Kinetic Partners where he is responsible for advising asset management firms on regulatory, compliance, corporate governance issues and cross-border fund distribution. Before joining Kinetic Partners, Hamrock held senior positions with a financial services consultancy group and with State Street Global Advisors. He was responsible for SSgA’s cross-border fund distribution from their Brussels-based client services centre. Previously, he was responsible for the establishment and cross-border marketing of Federated Investors’ UCITS business. He holds an MBA in International Business and Industrial Development from the University of Ulster in Northern Ireland, a Certificate in Investment Planning from Boston University and a BSc. in Business Administration from Suffolk University. In addition, Hamrock serves on the Legal and Regulatory Committee of the Irish Funds Industry Association and on the Taoiseach’s Financial Services Working Group.