The past two years have been turbulent ones for the hedge fund industry, and Luxembourg has not been exempt from the global decline in assets under management resulting from falling stock markets and a new mood of caution among investors. Yet there are signs that thanks to a flexible range of products and a reputation for solid but well calibrated regulation, the grand duchy is well placed to emerge from the economic downturn with its position as a domicile and service centre for hedge funds enhanced.
Confidence in the future of the jurisdiction is evident from the number of new specialist fund administrators establishing a presence in Luxembourg. Last September, a merger with Equity Trust's Fund Services division brought the hedge fund and fund of funds expertise of the Custom House Fund Services Group to Luxembourg via Custom House Fund Services (Luxembourg). The Custom House Group is now a part of Equity Trust.
Along with rebranding under the Custom House name, renowned in the fund services industry as one of the largest independent alternative administrators, the past year has seen various operational, technical, procedural and other changes, as Custom House (Luxembourg) has adopted the IT platform used by the group in centres around the world including Dublin, Chicago and Singapore.
Funds that are listed or domiciled in Luxembourg, which carry a regulatory requirement for administration, transfer agency and audit to be carried out in the home jurisdiction, benefit from Custom House's integrated systems covering fund accounting, equalisation calculations and reporting to shareholders and managers.
However, the global platform enables some of the work on hedge funds administered out of Luxembourg but domiciled in offshore jurisdictions such as Cayman or the British Virgin Islands to be outsourced to group operations elsewhere in the world that offer lower costs or greater capacity. The local office is now carving out a specialist role in client relationship management for funds based all over the world, drawing on Luxembourg's skilled multinational and multilingual workforce.
The office handles funds ranging in size from more than USD 1bn in assets to start-ups running just a few million dollars. For emerging managers Custom House prides itself of providing a broad range of support including advice on structuring and launching funds as well as on the choice of domicile jurisdiction, which also gives the firm a close understanding of its clients and their products.
Luxembourg is already well placed as a centre for alternative funds because of its expertise in audit and legal services as well as administration, but also its proactive attitude in creating fund structures tailored to the industry's needs - notably the Specialised Investment Fund established by legislation of February 13, 2007, a milestone in persuading alternative asset managers to come to Luxembourg.
The SIF, which is aimed at sophisticated investors and has been used for private equity, venture capital, real estate and other alternative funds, has enjoyed runaway success since its launch, helping meet the needs of managers and their investors for the right mix of flexibility alongside sound regulation, risk management and corporate governance.
Luxembourg is set to emerge stronger from the crisis because of its ability to reinvent itself and its ability to learn from the past to balance the needs of financial innovation and investor protection - and global confidence in the quality standards that have underpinned the growth of the country's fund industry over the past two decades.
Mariusz Baranowski is managing director of Custom House Fund Services (Luxembourg)