The emergence of a home-grown alternative investment industry has been gradual over the two years since the introduction of Spain's new regulatory regime for hedge funds and funds of hedge funds, but despite the turbulent market conditions both independent and institutional managers are starting to exploit opportunities and undertake the essential process of investor education.
Lyxor's activity in the Spanish market since the new law on hedge funds was approved has focused mainly on providing alternative solutions to clients seeking to launch their own funds but without the resources to do so, serving private banks' funds of funds, and offering investment management for the 10 per cent portion of each mutual fund's assets that can be invested in alternative assets such as commodities, hedge funds or real estate.
While many larger institutions in Spain have in-house hedge fund management expertise, some have decided to use Lyxor as a third-party provider because of the advantages of its platform, including segregation of assets, risk control, liquidity and transparency. In addition, Lyxor has launched its own range of Ucits III vehicles that has gathered more than EUR500m from institutional investors looking for decorrelated extra performance over cash.
The new regime has given Spain one of the best and most open legislative frameworks for hedge funds in Europe, and one that will certainly lead to significant growth in the use of alternative investments once market participants have undertaken greater educational efforts and dispelled the still widespread perception that alternatives are more risky than investing in equities.
The alternatives market in Spain has been slower to take off than expected for a number of reasons. Development of the business was hindered by a lack of sophistication not only among investors but the staff responsible for sales in banks' branch networks, who found it hard to explain to customers the sources of return and risk from alternative investments. In addition, the very difficult market environment since the first funds were launched a year and a half ago has made it hard for managers to build a compelling track record in terms of performance.
Sooner or later funds will start to perform and clients will realise that alternative funds are effective diversifiers of their portfolios. However, Spanish clients are not used to the illiquidity and lack of transparency of hedge funds, which is where Lyxor has an edge in terms of quality, range of products and especially liquidity - weekly, compared with monthly or even quarterly for most managers' offerings in the market.
So far foreign-based managers have been unable to register their funds for direct sale in Spain - an understandable approach that seeks to nurture the development of the indigenous hedge fund industry. However, because it denies clients access to best of breed managers, this policy is another factor that is hindering the growth of the market.
Eventually the authorities will have to open the market up to international managers to allow customers a broader range of products. In the meantime Lyxor is planning to launch a new range of Ucits III-compliant funds that will offer Spanish retail investors and private banking clients access to hedge fund strategies through funds benefiting from the EU single passport.
Ander Lopez is head of alternative investments for Spain at Lyxor Asset Management