Within the last 12 months, the financial world had to weather a storm that is unprecedented in history. In line with the major indices showing levels of constant and extreme volatility and showing dramatic declines on a net basis, the assets under administration for traditional investments have decreased accordingly in Luxembourg as well.
Accordingly, hedge funds, which traditionally and as per definition are bound to profit from such a volatile and extreme market environment, did not show the aggregate performance that one could have expected under the said conditions. However, it is understood that the hedge fund market needed some time to adapt to the new situation, and that performance is expected to improve from here. But traditional markets are, and will remain, under fire in the near future.
An interesting observation within this microcosm is that the success and the resulting launches of new Specialised Investment Funds (SIFs) have almost offset the losses experienced in traditional investment funds.
The SIF could hence become the vehicle of choice for a number of promoters in the hedge fund arena who are looking at finding the right jurisdiction for their planned vehicles or even relocating existing funds to a more regulated fund domicile. The latter ultimately reflects the desire of institutional, high net worth, but risk adverse investors to use regulated environments for their investments.
Another point worth mentioning regarding the SIF, is that it must appoint a Luxembourg custodian whose role can be described as that of a supervisor of the assets, whereby the custodian should know at all times where the assets are held. Albeit lighter than the previous law of 1991 through the absence of the requirement to control the regularity of certain operations, this is a concept that does not exist as such in the major offshore jurisdictions, hence making processes in these jurisdictions more straightforward in the case where hedge funds appoint prime brokers. Having therefore long been considered a negative point, the concept suddenly seems to bear fruit in the form of providing the promoter, and ultimately the investor, with incremental security with regards to retaining control over the assets.
If, however, the hedge fund sphere should elect Luxembourg as their new onshore European hub aside from Dublin, will Luxembourg, which has been predominantly active in providing services to the long only world as well as to fund of hedge funds when it comes to alternative investments, be geared for it from a knowledge and capacity point of view?
Capacity constraints seem undeniable, but that is the case in each jurisdiction, and we believe that we are best geared to take advantage from our geographical position within the European Union and its new emerging countries. The Luxembourg players, which encompass the industry and the government, are making joint efforts in the education process with special emphasis on our industry. This desire of this rather young workforce to excel is, at the present moment, enabling us to meet the ever-increasing complexity of financial instruments and derivatives used by hedge fund managers in their quest to produce performance.
Future challenges will be to keep up with increased volumes, the pricing of new and even more complex financial instruments, shorter valuation cycles, and increased levels of compliance, corporate governance and due diligence, as well as the provision of ancillary products such as credit, foreign exchange and stock lending.
Luxembourg-based administrators and custodians such as Fortis Prime Fund Solutions are well placed to provide this entire range of services as a complement to the basic administration duties that are performed for hedge funds and funds of hedge funds.