MIGRATION OF OFFSHORE FUNDS TO EUROPE: THE CYPRIOT ICIS ALTERNATIVE

Contributed by C. Savva & Associates Ltd. [www.savvacyprus.com]

A recent survey by RBC Dexia Investor Services and KPMG has revealed that a significant number of hedge fund managers will continue the trend of creating EU-domiciled hedge funds to complement their Cayman Islands or other offshore offerings. The survey also suggests that alternative investment vehicles such as the ICIS (Cyprus), QIF (Ireland) and SIF (Luxembourg) are gaining popularity versus the UCITS framework (a UCITS, or Undertakings For The Collective Investment Of Transferable Securities, is a public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union).

The causes of this current movement are twofold. First, this trend is the result of investors becoming increasingly wary about allocating capital to offshore products. Secondly, the EU’s Alternative Investment Fund Managers Directive (AIFMD) is also a major factor for managers considering re-domiciling in the future.

Although there is still a high level of uncertainty regarding the final nature of the regulation, in particular the rules surrounding the use by hedge fund managers of the private placement regime to market their non-EU funds in the EU, it is due to be finalised later this year and enter into force on the 20th day following its publication in the Official Journal; member states will have two years to transpose its provisions into national law.

Highlights of the above mentioned survey, which polled 49 hedge fund managers with US$159 billion in assets under management, are as follows:

• Some 24% of hedge funds polled had already re-domiciled their funds while a further 27% said they would consider doing so at a later stage. The survey revealed that 58% of managers who had re-domiciled had used UCIT structures. A similar number had also used regulated, non-UCIT vehicles (some have used both products simultaneously).
  
• Of the 27% who considered re-domiciling, 77% said they would opt for a regulated, non-UCITS fund, such as the Cyprus International Collective Investment Scheme (ICIS), Irish Qualified Investment Fund (QIF) or Luxembourg Specialised Investment Fund (SIF). ICIS, QIFs and SIFs share some of the characteristics and flexibility typically found in hedge funds and they generally cater to sophisticated investors. Just under half of the respondents favoured UCITS while a very small minority preferred an unregulated structure.
  
• Respondents were divided with some adopting a “wait and see” approach to the EU regulation, while others feel “the ongoing uncertainty was likely to encourage them to establish an EU fund before 2013 in order to ensure minimal disruption and uncertainty in regards to their business operations.” The survey also predicts there will be a wave of re-domiciliations during 2012 in anticipation of AIFMD.
  
• The market appears to be realising that although 90% of alternative strategies can be replicated under UCITS, specialised structures such as ICIS, SIFs and QIFs offer more flexible liquidity and transparency rules for hedge funds. While the UCITS regime can offer robust protection for investors, the wholesale shift into alternative UCITS which some had been predicting has not taken place.
  
• Approximately 52% of managers acknowledge EU restrictions on institutional investors allocating to offshore funds was the key driver for re-domiciling. For example, in some EU member states, insurers are faced with punitive capital charges or other restrictions on their investments in offshore funds when compared with investments made in EU regulated investment funds.

The popularity of the Caymans among investors could be further damaged by a recent decision by the Cayman Islands Court of Appeal to strike out two winding up petitions presented by an aggrieved investor against Camulos Capital, a hedge fund that suspended redemptions after the financial crisis.

This will increase the desire on the part of investors for funds to be set up in jurisdictions with European legal systems, company law and regulatory framework. The trend is also being driven by investors’ desire to hold money in more regulated jurisdictions, such as French pension funds currently coming under strong political pressure not to invest in lightly regulated offshore products.

Although traditional offshore fund centres such as the Cayman Islands are still considered the best domicile choice for many hedge fund managers, co-domiciliation, with hedge funds offering both offshore and onshore options, is the most likely way forward. Market interest in alternative UCITS is growing but these structures are likely to evolve as complementary to offshore hedge funds in the longer term rather than replacing them.

It is clear now that EU fund domiciles are becoming increasingly more relevant to the hedge fund community. The Cypriot ICIS offers a viable solution to the real need among clients for more liquidity and transparency. Co-domiciliation (i.e. Cyprus ICIS combined with offshore funds) will allow 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.

Click here to learn more about Savva & Associates Fund Services and the Cypriot ICIS regime.

Should you require any clarifications and/or assistance, please do not hesitate to contact Charles Savva at c.savva@savvacyprus.com.

Contact Details
C. Savva & Associates Ltd
15 Aglantzia Avenue
2nd Floor, Office 202
2108 Nicosia
Cyprus

Tel: 357 22 516 671
Fax: 357 22 516 672
Email: info@savvacyprus.com
Web: www.savvacyprus.com

Read More Contributed Articles