By James Williams – There’s no question that Malta has come a long way as a fund jurisdiction since it entered the EU in May 2004.
Political stability, a strong banking system and a business-friendly regulator in the form of the MFSA are important macro considerations for any fund manager looking to launch new funds into Europe. In recent years, hedge fund firms like Finisterre Capital LLP have moved their operations onshore to Malta, as well as Comac Capital LLP, Clive Capital LLP and energy hedge fund BlueGold Capital Management LLP.
Moreover, Malta has started to see the launch of innovative funds such as Exante’s Bitcoin Fund, which actually began trading last October but has only recently started more aggressively marketing itself. The fund, which trades the crypto-currency (an inflation-proof electronic currency), distributes shares exclusively through the Hedge Fund Marketplace platform developed by Exante; an integrated trading and fund platform that blends multi-asset fund support with first-class trade execution services using a sophisticated technology infrastructure.
The only thing that Malta really needs to worry about as more hedge fund managers choose it as their preferred fund domicile is whether it can maintain a big enough professional labour pool to meet demand; namely lawyers and financial services professionals.
“At the base of the pyramid are local employees and so far we are managing demand. At the top of the pyramid there are mainly the portfolio managers who have relocated from London and other jurisdictions, with some high-end posts being occupied by locals as well. Naturally, it’s always a difficult decision for portfolio managers to relocate to another country with family. For example, when the UK introduced the 50 per cent tax rate the expectation was that a lot of London-based managers would relocate to Switzerland. That didn’t happen in a material sense.
“Having said that, I think we’ll continue to see an inflow of interest from Switzerland. Swiss managers are quite thirsty for a good jurisdiction and Malta seems to be very much to their liking,” comments Joseph Saliba, partner at law firm MamoTCV Advocates.
This can be explained by the introduction of the revised Collective Investment Schemes Act (CISA) and Collective Investment Schemes Ordinance (CISO) in Switzerland on 1 March 2013. Overnight, hedge fund managers went from being regulation-free to falling under the watchful gaze of Finma, the Swiss regulator.
“The Swiss are among the most active but we’ve also seen managers coming from the UK, Italy, Belgium and other parts of Europe. They’re not all coming for the same reasons but the attractiveness of being able to set up a fund management company in Malta and passport it into any other European jurisdiction is definitely one of the major propositions,” adds Michael Galea, Head, Investment Management & Fund Services, Calamatta Cuschieri, one of Malta’s largest and most established financial services firms.
One thing that Saliba is not confident that Malta should do is to try and promote itself as a wholesale fund jurisdiction like Luxembourg. “Because of its size, Malta needs to focus on a couple of niche markets – for example private equity, small- to mid-sized hedge funds – and continue to build out its expertise accordingly. I’m not saying this will necessarily happen, but I think by doing so it will allow us to seriously compete with other jurisdictions in the relevant sectors.”
Sensible as that may be, is there, however, a risk that Malta will be viewed as being too boutique? Galea says that people have mixed opinions on this.
“I’m one of those who thinks we shouldn’t rest on our laurels and be satisfied with servicing only smaller managers. Make no mistake, they are important to us and all other service providers on the island as they have helped shape the backbone of the fund industry in Malta. But it would be short-sighted, in my opinion, if the island’s strategy was to focus just on that part of the market.
“We can take it to the next level but it’s a bit of a chicken and egg situation in the sense that you can’t really expect to attract huge asset managers overnight because the jurisdiction is relatively young and, for example, the number of custodians remains limited. It will take time but the message here is that we are confident in our abilities, and if we can service the smaller managers effectively, we can do the same for larger managers,” asserts Galea.
One such manager that chose to launch its hedge fund from Malta is A3E Capital, whose A3E Emerging Market High Yield fund went live on 1 October 2012. The fund aims to generate absolute returns through investing in EM fixed income and currencies. It was up +5.22 per cent through July, having generated +1.26 per cent in July alone.
Latvia-based Aldis Reims is Chairman of the Board of Directors and CIO at A3E Capital: “Two years ago my partners and I decided to leave our careers in banking and launch our own hedge fund. We examined a number of fund domiciles and after initial analysis chose in favour of an EU rather than an offshore domicile in view of changes to EU regulation and how we wanted to market the fund to target investors.
“Included on the shortlist were Ireland, Luxembourg and then Malta came up. Initially we treated it a little suspiciously but after careful consideration we decided it was the best option. We met the regulator, a number of service providers, and found Malta to be a friendly place for fund business. Moreover, the costs are significantly lower when compared to other more established EU fund domiciles. We started with around USD20million and for us it was a good place to launch the fund,” explains Reims.
Due to its size, the fund utilises the PIF structure. Specifically, it is a self-managed Qualifying Investor PIF (no Malta-based fund management company) where the minimum investment is EUR75K.
“As we are a self-managed PIF we need to have all our investment committee meetings in Malta, which isn’t a bad place to go for someone from Northern Europe! Under Maltese law, at least three of the four investment committee meetings each year must be held on the island.”
Praxis Fund Services was chosen as the fund’s local administrator because “their approach is slightly more individual than others on the island”, says Reims. Due to the nature of the trading strategy, having the support of a fund administrator that could offer a tailored approach, as well as expertise during the setting up process, was an important selection criteria.
“We then chose PricewaterhouseCoopers (Malta) as our auditor to ensure the fund appealed to investors. UBS Luxembourg is the prime broker and custodian for the fund.”
When asked how easy the process was of setting up the fund, Reims adds: “It was strict but it was fair. We don’t have any complaints. The MFSA is a good example of how regulators should work.”
Around 70 per cent of all funds domiciled in Malta use local administrators. This is testament to the quality of firms operating there. For Custom House Group Global Fund Services, however, Malta is just one cog in a global wheel that allows the firm to administrate funds 24/7 from Singapore in Asia, to Malta, Dublin, Luxembourg and Guernsey in Europe and Chicago in North America.
Having said that, Malta is a very important location for the group.
“We have aggressive plans for the local operation both in terms of fund numbers and enhanced operations. In terms of Malta-domiciled funds (both PIFs and AIFs), to date what has earmarked Malta is the open-minded, business-friendly approach of the regulator and the willingness of its service providers to find the right solutions for its clients. If we can keep that way of doing business then Malta will continue to enhance its funds industry,” explains Kevin Caruana, Managing Director of Custom House Group’s Malta office.
“For example, there was a change of government recently but there was no change whatsoever in its philosophy towards the funds industry. There’s good continuity and stability here, which is important to the long-term objective of increasing Malta’s financial services industry as a percentage of GDP. We have a full commitment to Malta.”
This sentiment is clearly echoed by Calamatta Cuschieri’s Galea, who maintains that while Malta should sets its sights high, the firm itself will remain focused on offering a bespoke, personalised service to its clients: “We’re going to keep on pushing as a business and keep on investing in human resources, in IT systems and in building out our client service offering. Our service offering is like Malta itself; niche. We’re a boutique firm offering a tailor-made service to our clients and their investors. In addition, being an integral part of the CC Group gives us the added advantage of enabling us to understand the requirements of our clients – the investment managers – and service them in a way that is second to none.”
New fund launches aside, Dr Jean Farrugia, partner at Maltese law firm DF Advocates, says that from an advisory perspective “it’s been a busy year because our clients want to understand and get prepared for the AIFMD. We’ve been closely examining the MFSA’s rulebook on how it will implement the Directive. Both existing and prospective clients want to know how this will affect their business and how they could use Malta as a springboard to accessing other European markets.”
The point here is that until those rules were codified, fund managers have been reluctant to structure new funds. Now that there is greater clarity, Farrugia expects fund formation activity to build into Q4 this year and on into 2014.
“We have existing clients who have indicated their desire to opt in to the AIFMD and we’re currently helping them get everything in order to become compliant. Most of our clients are European managers targeting European investors. They view Malta as a cost-effective, fiscally advantageous and fully EU regulated and compliant jurisdiction from which to domicile and market their funds. We are also starting to see more interest from US managers now that the Directive has been transposed,” confirms Farrugia.
There is much for Malta to be positive about in this new regulatory environment but the elephant in the room remains the lack of choice for managers when it comes to choosing custodians. Currently, there are less than 10 operating on the island, and whilst two of them are at least global names in the form of HSBC and Deutsche Bank, a lot more needs to be done to address this gap in the market.
On the one hand, the flexibility for managers to continue using external depositaries until 2017 – at which point a local depositary will be required under the Directive – is widely applauded. On the other hand, the threat of having to use a local depositary, even if it is years away, is a big concern to managers. As Farrugia rightly points out, one of the selling points managers present to investors is the strength of their service providers. They are accustomed to working with global names with strong reputations.
“There is still space for reputable custodians to come and set up operations in order to augment the existing pool of custodians in Malta, and, ultimately, to continue attracting more funds business to Malta, particularly in light of the new AIFMD depositary requirements,” comments Farrugia.
Interestingly, he thinks that with the AIF now available in Malta, which is targeted more at hedge fund managers, the result could be that interest in UCITS funds will diminish. That’s perhaps no bad thing given that there are only around 64 registered UCITS funds on the island.
One of the potential solutions to the custodial issue is that the MFSA ultimately allows AIFMs to maintain relationships with their existing custodians beyond 2017. Another solution could be for local custodians to enter into sub-custody arrangements with non-local entities.
“Malta-based AIFs and AIFMs are allowed to appoint an AIFMD-compliant depositary based in another EU or EEA Member State until 2017, after which they must engage the services of a Maltese depository. The AIFMD then permits and regulates the delegation of safekeeping services to third parties, provided of course that such delegation is not made with the intention of avoiding the requirements of the AIFMD and that there are objective reasons for such delegation. In this case the AIFMD provides an element of flexibility for tailoring fund setups,” suggests Farrugia.
Custom House Group currently has a custody license which limits it to servicing fund-of-fund clients. “This is not a service we actively sell on its own, rather it’s an ancillary service for FoF clients for whom we do fund administration,” says Caruana, who confirms that the firm is considering options to extent its custodial license to offer ‘Depositary Lite’ services under the Directive.
“It’s on the discussion board. We are seeking legal advice on the matter. We want to make sure that we are fully prepared as this could be a good opportunity. We need to assess all the options; whether to do it directly or to partner up with specialised service providers. We are studying the possibilities as we speak.”
