By Ger van Nijkerken - Switzerland’s position at the heart of Europe means that the country’s alternative investment industry tends to be pressurised to follow European Union regulation, a situation that presents both challenges and opportunities. A new white paper issued by SwissAnalytics and Advent Software, entitled Trends in Alternative Investment Regulation – Key Issues for Swiss Managers, argues that single-strategy managers targeting EU investors may finds Ucits structures best suited to their requirements.
The EU’s series of directives on Undertakings for Collective Investment in Transferable Securities, which cover the cross-border marketing and distribution of funds open to retail investors, is one of two areas where EU regulation is a key issue for Swiss managers. The other is the Alternative Investment Fund Management Directive, which will take effect in 2013 and two years later is scheduled to allow non-EU managers to market funds to sophisticated investors throughout the union’s 27 member states.
For now, the Swiss single manager hedge fund market is relatively small (just 4 per cent of the global total), managers’ activities remain largely unregulated, and funds are typically domiciled offshore. Funds of funds are a different story, with Swiss managers accounting for about 30 per cent of the global market and funds overwhelmingly domiciled in Switzerland Itself, Luxembourg and Ireland. A 2009 survey suggested that around 72 per cent of funds of funds’ assets were sourced from EU-domiciled investors.
Already, the paper notes, many Swiss managers domicile funds in Luxembourg and Ireland to access retail investors throughout the EU as well as at home. Some have exploited changes brought by the Ucits III legislation in 2001 that allow managers to take short positions and employ leverage by using derivatives, allowing hedge fund strategies to be offered through products that can be freely marketed throughout the EU. By contrast, traditional offshore hedge funds can only be marketed in the EU through private placement on a country-by-country basis.
Swiss managers can create Ucits-compliant fund of hedge funds-type products through synthetic index replication structures, the paper says, but also through direct investment in the growing number of Ucits funds that use derivatives to replicate alternative strategies; both specialist fund of fund managers and Swiss private banks have already done so. The latest version of the legislation, Ucits IV, should benefit managers notably by simplifying procedures for the marketing of funds across EU borders.
The AIFM Directive covers all non-Ucits funds domiciled or marketed in the EU with assets exceeding EUR100m in the case of open-ended hedge funds (many Swiss managers of single hedge funds would currently fall below this threshold). Otherwise, to gain a ‘passport’ under the directive, Swiss managers will have to comply with the same rules as their EU colleagues in areas such as transparency, manager compensation, organisation, risk management and anti-money laundering procedures. Much hangs on subsidiary legislation and regulation that still has to be drawn up.
The white paper concludes that many Swiss-based managers will find it easier to use the Ucits route to access European investors, perhaps in tandem with an offshore fund marketed in other parts of the world. Managers not targeting the EU may gain an advantage over European rivals by escaping the AIFM Directive’s more onerous provisions, but those with EU-domiciled funds may faced increased difficulties unless the Swiss regulator, Finma, concludes co-operation agreements with its Luxembourg and Irish counterparts, as the directive requires.
Ger van Nijkerken is director of sales for central Europe and head of international business development at Advent Software