Luxembourg enjoys a worldwide reputation as a centre of excellence for the establishment and administration of traditional investment funds, but until recently it was not as well known as a jurisdiction for alternative investments - even though for years managers have been setting up funds with an alternative investment strategy organised under Part II (non-Ucits) of the 2002 fund legislation.
Although it is starting from a relatively small base, Luxembourg's hedge fund industry has been growing swiftly throughout this decade, assisted by growing expertise within the fund services industry and greater flexibility offered by the current fund legislation and regulatory approach.
At the end of last year, according to the Financial Sector Supervisory Commission, a total of 187 hedge funds and 383 funds of hedge funds were domiciled and administered in the Grand Duchy, while hedge fund assets grew by 129 per cent and fund of fund assets by 27 per cent in the course of the year.
Since then the industry has enjoyed a boost from the adoption of the Specialised Investment Fund (SIF) legislation in February, which brought various benefits for promoters considering Luxembourg as a domicile. These include an advantageous fiscal regime that exempts capital gains and income from tax; the removal of quantitative investment restrictions; greater flexibility in reporting and valuation, including removal of the requirement to disclose the whole portfolio; and abolition of the promoter approval requirement, which is helpful to small and start-up managers who do not have a track record.
It is hoped that promoters who previously would have had to set up in the Caribbean will enjoy the reputational comfort of Luxembourg in an environment that is now less restrictive.
The SIF structure can be used for traditional funds as well as hedge funds, real estate and private equity vehicles. The ability to establish a SIF as either a Sicav or an FCP is particularly advantageous for real estate funds, which account for a substantial proportion of applications introduced in the first six months of the regime, especially from German promoters.
The growth of Citi's alternative investment business in Luxembourg has mirrored that of the sector as a whole. The group has long been one of the country's leading administrators of traditional funds as well as exchange-traded, structured and pension products, but the acquisition earlier this year of Bisys, one of the world's largest specialist hedge fund administrators, has given Citi access to a deep pool of expertise in various centres, as well as to a proven technology platform specially designed for the needs of the alternatives market.
Citi also recently announced its first Luxembourg-domiciled hedge fund client. Nexum appointed Citi to service its Luxembourg-domiciled fund by providing fund administration, transfer agency, custody, prime brokerage services and compliance monitoring. The solution is live and all assets have been successfully migrated onto Citi's common fund administration and custody platform in Luxembourg.
As hedge funds become available to a wider clientèle, Luxembourg is well placed to become a distribution centre from which to roll out hedge funds to a more retail market, especially as traditional funds start to explore the use of alternative assets such as OTC derivatives that previously were restricted to hedge funds. As the lines between traditional and alternative managers starts to blur, the combined skills of Citi and Bisys enable the group to offer expert service on both sides of the market.
Nina Kleinbongartz is product manager for alternative investments in Europe with Citigroup Global Markets in Luxembourg