The global fund industry has not yet returned to the heights of the boom years before 2007 – indeed, it may never do – but over the past year the mood in the sector has markedly improved. Especially in Luxembourg, there are signs aplenty of renewed confidence that business is coming back to a centre that has built on its reputation as a retail fund domicile to carve out an important niche in the alternative sector as well, says Mariusz Baranowski (pictured), the former managing director of Custom House Fund Services (Luxembourg).
An important indicator of Luxembourg’s growing reputation for hedge fund services is the continuing influx of administration firms, many of which, like Custom House, have a global presence, while other institutions already present in the grand duchy are obtaining licences from the regulator to provide fund services. The business opportunities they see are reflected in a rebound in domiciled fund assets, which have moved back above the ‘high water mark’ of EUR2trn.
Custom House has been active in Luxembourg for more than two years since its merger with the fund services business of Equity Trust in September 2008. The office is now fully integrated in terms of systems and procedures with the group’s international network, which includes operations in Malta, Ireland, Chicago and Singapore, and is able to call on the expertise of specialists around the globe in areas ranging from fund formation and accounting to legal issues and IT processes.
With global pressures from regulators and investors alike prompting speculation about a shift toward more transparent fund products domiciled in regulated jurisdictions, Luxembourg is ideally placed to take advantage thanks to its long-experience in dealing with Ucits retail funds to which transparency and liquidity have always been central, by contrast with traditional offshore centres outside Europe. An additional advantage is its position as the main distribution hub for funds not only throughout the European Union but in regions such as Latin America and East Asia.
That said, the current enthusiasm for so-called ‘Newcits’ funds that use the ability of Ucits funds to invest in derivatives to replicate hedge fund strategies may be overstated, with evidence that a number of popular strategies are hard to deliver while complying with the Ucits diversification rules.
In addition, it is often difficult for managers to adapt to a switch from sophisticated, long-term strategic investors to a mass market that has access to at least twice monthly dealing. Nor does the Ucits framework protect investors against fraud and mismanagement if they fail to do their due diligence homework.
There has been extensive discussion of the impact on the fund industry of the European Union’s newly-agreed Directive on Alternative Investment Fund Managers, but it is less pivotal to groups such as Custom House that have operations both within and outside Europe and that service many funds around the world where neither the manager nor the investors are based within the EU.
The Luxembourg office is part of a network that delivers a global service but is also capable to adapting to the specific requirements and regulations of individual markets, and that has regional sales forces attuned to the needs of local products and investors. With so many variations worldwide in the legal framework for funds, ranging from KYC procedures and due diligence requirements to tax treatment, the key to success in Luxembourg and elsewhere lies in a combination of a global organisation with a local focus.
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