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Co-domiciled hedge funds on the rise as non-UCITS onshore structures gain traction

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 A survey report released today by RBC Dexia and KPMG predicts that hedge fund managers will continue to create EU-domiciled hedge funds to complement their Cayman Islands or other offshore offerings, but that the QIFs and SIFs were gaining popularity versus the UCITS framework.

The survey challenges the notion that onshore domiciles could rival the supremacy of the Cayman Islands amongst hedge fund managers. Only a quarter (24%) of hedge fund managers said that they had already brought offshore funds onshore. Of those, more than half (55%) said they opted for co-domiciliation by creating onshore clone funds to complement their existing Cayman or other offshore offerings. Less than 5% of those with onshore funds said they had decided to transfer the domicile of their funds to the EU outright. The trend for hedge funds to create more EU regulated funds seems set to continue however, with 27% of respondents stating that they are considering doing so.

Jean-Michel Loehr, Chief of Industry and Government Relations at RBC Dexia, says: “The survey shows that EU fund domiciles are becoming more and more relevant to the hedge fund community, and that they respond to a real need amongst clients for more liquidity and transparency. Co-domiciliation allows hedge fund managers to cater to investors that are not authorised to buy into Cayman funds with onshore products while retaining their existing offshore strategies."

The prominence of co-domiciliation could be short lived however due to uncertainty over the AIFM Directive: most hedge fund managers considering domiciling their funds in the EU said they would do so before the implementation of the AIFM Directive in 2013, and fully 69% of them said they were considering doing so by transferring the domicile of their existing funds to the EU.

The research also shows that the UCITS framework, which some respondents said was an effective marketing tool to stem outflows during the financial crisis, has lost some of its appeal amongst hedge fund managers. Indeed, whereas those polled were just as likely to set up UCITS funds as other regulated structures, such as Irish QIFs and Luxembourg SIFs, in the past, 77% of those considering creating an onshore structure in the future now say they would prefer QIFs and SIFs instead.

Tom Brown (pictured), KPMG Head of Investment Management for the EMEA Region, says: “The market is starting to realise that even though 90% of alternative strategies can be replicated under UCITS, specialised structures such as SIFs and QIFs offer more flexible liquidity and transparency rules for hedge funds. UCITS still offers very robust protection for investors, but clearly the wholesale shift into alternative UCITS some had been predicting has not taken place.”

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