Could Ireland become a leading hedge funds domicile?
By Simon Gray
In its report for the IDA last year, Deloitte & Touche suggested that encouraging hedge fund managers to set up shop in Ireland would be a good way to give the country's financial sector new momentum.
But some leading administrators caution that a major influx is unlikely without substantial legislative changes to make Ireland more attractive as a hedge funds domicile.
According to Deloitte audit partner Ronan Nolan, the 'community effect' tends to keep hedge fund managers in and around centres such as New York and London. However, the emergence of a large hedge funds industry in Dallas, not hitherto regarded as a significant financial centre, demonstrates that it is not necessarily a closed shop.
"I don't think that anybody would underestimate the challenge," Nolan says. "Realistically we're certainly not going to take all London's business away." But given the speed at which the industry is growing, he argues that even a small proportion of new business - "crumbs from the giant's table" - could represent a significant and worthwhile addition to the country's financial sector.
But a potential obstacle to attracting hedge fund managers lies in the fact that Ireland is not currently viewed as a particularly attractive domicile for alternative funds by comparison with jurisdictions in the Caribbean or even Luxembourg, even though Dublin's administration business is much bigger.
Mark Mannion of UBS acknowledges that Irish-domiciled funds remain a relatively "rare breed", but he believes that is set to change. "If European institutions such as pension funds increase their allocation to this asset class, it is likely that they will use funds established and regulated in recognised jurisdictions," he says.
"Positioning your fund within the EU may be a very sensible long-term play, because institutional investors will perceive that there is a greater level of oversight than in the Caribbean. Big UK and French institutions have already domiciled hedge funds in Dublin. It's expensive and time-consuming, but we think it will represent an increasing proportion of business over the next five years."
According to PFPC International's Ken Somerville, Dublin could make itself more attractive as a domicile by introducing different classes of fund. He says: "There could be variations in regulation depending on the investor profile, minimum investment size or the investor's minimum net worth. There could be interest in funds regulated by IFSRA but otherwise similar in substance to Cayman funds."
Otherwise, argues Custom House chairman Dermot Butler, the higher cost of operating in Dublin is likely to deter many managers. "Domiciling a fund in Dublin is more expensive and takes longer than setting up a fund in Cayman or the BVI, and in certain areas it is more restrictive regarding assets," he says.
"This means that to be viable, Dublin funds need to be bigger, but bear in mind that most hedge funds have capacity constraints. I don't think Ireland will ever become a leading hedge fund domicile, unless the EU makes it more difficult for non-European funds to be sold in Europe." Could a UCITS IV directive that eased pan-European distribution of hedge funds make a difference?" says Butler: "Not in my lifetime!"
BISYS managing director Ronan Daly is also sceptical. "Unless there is some enormously significant change to legislation, I can't see Dublin becoming the jurisdiction of choice," he says. A particular problem, he says, is the regulatory requirement for a fund to have an Irish custodian or trustee to oversee the assets, even though most hedge funds' assets are held by their prime broker. This leaves the trustee with extensive potential liabilities for which it is not properly compensated.
"Because the way the rules are drafted, the trustee is on the hook if anything goes wrong with the assets, which are actually being held somewhere else," Daly says. This would be financially attractive only if the trustee made money elsewhere, for example if it also owned the fund's prime broker or administrator.
Otherwise, he says, the industry would have to pay the trustee a significant fee to carry out its duties, but "this would again leave Dublin at a financial disadvantage to somewhere like Cayman". But Daly concludes: "The domicile issue is a bit of a red herring. The domicile of the fund matters enormously to the law firms, but it doesn't matter greatly to anyone else."
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