With its long-standing background as the largest centre for the domicile and servicing of traditional mutual funds outside the US, Luxembourg has approached the hedge fund industry from a different
With its long-standing background as the largest centre for the domicile and servicing of traditional mutual funds outside the US, Luxembourg has approached the hedge fund industry from a different perspective than offshore centres such as the Cayman Islands and British Virgin Islands, or even Ireland. The jurisdiction’s role is coloured by its culture and experience, while the alternative managers who use Luxembourg are also a different breed, with different strategies to tap broader markets.
Whereas in the past hedge fund distribution has been carried out principally through private placements, Luxembourg’s expertise in cross-border distribution is now set to come into its own as new players in the market, notably big institutions, are keen to take advantage of that capacity rather than limit themselves to the private placement channel. The key to this development is the surge in establishment of funds that use the flexibility offered by Ucits III vehicles to offer alternative strategies to a pan-European market.
This shift in strategy reflects to an extent a change in the type of managers entering the market. Whereas in the past start-ups would typically be launched by traders leaving the prop desk of an investment bank to build their own businesses, today it is increasingly big financial groups that are looking to extend their strength in traditional asset management and distribution to alternative products.
RBC Dexia Investor Services in Luxembourg is increasingly being approached by institutions looking for an administrator with the capacity to handle strategies that employ a wide range of OTC and listed derivatives to generate alpha. Today they have the option of using Luxembourg’s new Specialised Investment Funds vehicle, but many of these managers prefer if possible to use new or existing Ucits III structures to offer products such as 130/30 funds or hedge fund indices, sometimes alongside their existing long-only range.
New business is coming from institutions that are existing clients and from traders and managers leaving bigger groups to launch their own operations, but also from asset managers whose traditional funds are administered by a service provider that is not capable of supporting them in their expansion into the alternatives sector. RBC Dexia is gaining business from this kind of client because of its acknowledged strength in terms of IT systems and the expertise of its staff.
In addition there are still Luxembourg-based investment managers that continue to administer their own long-only funds, but it’s quite a different matter to put in place a platform to service alternative products. It involves investing in new IT systems that can handle OTC derivatives and in a team that understand the products and instruments. Traditional fund managers must decide whether instead to outsource to a provider that already has the required experience and expertise. For the kind of institutions that are now launching alternative funds, it’s vital that they are serviced properly.
RBC Dexia is benefiting today from far-sighted decisions taken a few years ago to invest in the expertise and systems required to take on business such as the new wave of Ucits III alternative products. The next challenge is to recognise the direction of the industry, drawing on relationships with clients to maintain a good understanding of the market and prepare for changes in the future. One of the great benefits of being one of the largest third-party administrators in Luxembourg and worldwide is that it is the clients that drive the business in the right direction.
Eric Kata is director of business development for alternative investment with RBC Dexia Investor Services Luxembourg