Bringing clarity to the hedge fund regime

After a lengthy and complex legislative process, Spanish hedge funds have finally become a reality. Currently, there are approximately 30 management companies authorised to manage hedge funds and/or funds of hedge funds, including some that have been created from scratch and specialise in alternative asset management.

Others are traditional asset management companies that have upgraded their programme of activities to include the possibility of managing funds of hedge  funds, aimed at their retail clients, while still others are traditional management companies that also want to launch more sophisticated single-manager funds. Nevertheless, it is expected that more management companies will be either updated or created once the regulatory framework is finally clarified. As regards the products, there are presently only seven hedge funds and 13 funds of hedge funds registered with the Spanish securities markets regulator, the Comisión Nacional del Mercado de Valores (Spanish Securities Exchange Commission, or CNMV for short). This is because until the approval of the amendments to the Spanish Collective Investment Institutions Regulation published on March 17, there were outstanding issues that complicated the launch of new products.
 
These amendments have introduced a range of measures, including a liberalisation of lock-up terms, notice periods and conditions on the payment of redemption proceeds, and the authorisation of redemption gates, which have made possible the launch of funds of hedge funds. Therefore, it is likely that in the near future we will witness a substantial increase in the number of funds of hedge funds registered in Spain.

Nevertheless, it has yet to be clarified to what extent management companies will be required to disclose the fund portfolio, and what rules will govern the use of estimated net asset values. It would also be advisable to introduce more flexible financing options for funds of hedge funds. Likewise, under the current regulatory framework, it is not clear yet which regime will apply to foreign products that are intended for distribution in Spain. It seems that, at first, it will not be possible to register foreign open-ended hedge funds in Spain, only closed-ended hedge funds or structured products linked to hedge funds, through the European prospectus passport. However, this situation might change in the future once the Spanish hedge funds market is developed.

Regarding the eligibility of foreign hedge funds for investment by the so-called 'funds of free investment funds', as funds of hedge funds are described in the regulation, it stipulates that they must invest at least 60 per cent of their assets in Spanish hedge funds, in hedge funds set up in an OECD country, or in hedge funds whose management company is supervised in an OECD country.

For this purpose, Spanish regulation defines and broadly interprets the concepts of management company and supervision in an OECD country, which are to be understood as including not only asset managers but also investment advisors. At present the legislation does not establish any requirements regarding the investment policy of these  underlying funds, although the changes to the Collective Investment Institutions Regulation in March explicitly barred funds of free investment funds from investing in other domestic and foreign funds of hedge funds. The latest changes must be absorbed by the market and further legislative development may be required before Spain finally has a competitive regulatory framework and a broad range of products that can be registered and commercialised.

By Jesús Mardomingo and Úrsula García - Cuatrecasas in Madrid

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