Alternative options: Hedge fund redomiciliation trends in evolving markets 

The impact of the financial crisis in 2008/9 forced a major global rethink on the regulation of the hedge fund industry.

In Europe, the new Alternative Investment Fund Managers Directive or AIFMD will, over time, introduce a new wave of mandatory registration and regulatory disclosure with significant implications for the domiciliation of funds. 

Hedge funds have traditionally been viewed as offshore products with lighter regulation than onshore funds.

However, recent years have seen a significant uptake in the launch of hedge funds within the European Union.

Three months after the final AIFMD regulatory rules were approved, RBC Dexia Investor Services and KPMG have worked together to conduct a study of hedge fund managers to explore the trends, in respect of the domiciliation of their hedge funds to the EU.

Our report explores reasons for domiciling funds in the EU, including:
 

          - preferred EU fund structures;  

          - the methods used to move hedge funds to an EU domicile;  

          - the strategies managed in EU hedge funds and the choice of EU fund domicile. 

Speaker 2: Tom Brown (KPMG)
 
Various options exist to redomicile offshore funds to the EU (the set up of clone funds to complement existing offshore funds; transfer of domicile; fund mergers; set up of a new onshore fund and fully closing offshore fund).

Very few of the hedge fund managers in our study had fully re-domiciled their hedge funds away from offshore jurisdictions such as the Cayman Islands.

In fact what we have seen is that it seems likely that the optimum solution for hedge fund managers may be to co-domicile i.e.to retain offshore funds for investors who prefer and benefit from them, whilst setting up EU-domiciled funds to address issues from investors who prefer a greater degree of regulation and security. 

Just over half of our survey respondents (51%) have either “redomiciled” their offshore hedge fund or are considering doing so in the future, in almost equal measure, suggesting that there are some strong arguments for setting up an onshore structure.

Of the 24% of respondents that have already redomiciled hedge funds to the EU the top drivers have been:

Firstly, restrictions on the ability of certain European institutional investors to invest in offshore hedge funds. 

Secondly, the possibility of replicating hedge funds strategies in a UCITS.

Thirdly, the ability to offer more liquid, transparent and diversified hedge funds to investors.

Speaker 1: David Dibben (RDIS) 
 
49% of respondents said that that had not redomiciled or co-domiciled any funds in the EU and that they do not have any future plans to do so.

Their main reason for not doing so, in one guise or another, is predominantly due to the lack of investor demand.

According to the respondents of our survey, many investors do not see significant benefits in onshore hedge funds.

Instead, our survey found that these investors have been increasing their focus on due diligence as a result of the financial crisis, and that they have taken a more stringent look at their hedge fund managers, their strategies and the operational risks involved.

For a large number of existing investors, the traditional offshore hedge fund centres are therefore still widely considered to be the right choice.

Some fund managers have taken the view that there is no need to change domiciles, because existing practices and controls are sufficient.  What is also interesting is that hedge fund managers who have already set up onshore funds, have also expressed high levels of satisfaction, commenting that their ability to attract new investors has been the most interesting and rewarding aspect of launching a UCITS. 

Speaker 2: Tom Brown (KPMG)
  
Uncertainty surrounding marketing restrictions on the sale of non-EU hedge funds to EU investors in the final AIFMD was among the top three drivers for managers who were considering redomiciliation in the future.

Conclusion (Tom Brown) 

We are delighted to be working together with RBC Dexia on this successful project and would like to thank everyone involved in producing this thought leadership report.

In particular, we would like to thank the organizations who participated in this research and those senior executives who took part in the interviews and provided their time and insights. 

We look forward to sharing the full report and its findings with you.

We are positive that the study will make a useful insight into the future of hedge funds redomicilation and the basis for a constructive debate.