Alternative UCITS For Offshore Fund Managers

Author:Mr Mark Browne
Profession:Mason Hayes & Curran
 
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Funds authorised as UCITS1 currently hold in excess of 7 Trillion Euro and as international recognition of this form of fund regulatory authorisation grows the related opportunities are being examined by an increasingly broad spectrum of investment managers. These opportunities include both a legal right to avail of pan European Union ("EU") market access, but also potentially expedited registration and facilitated distribution in third countries where the UCITS brand is readily identified and accepted. Recent statistics illustrate that in excess of 40% of all UCITS sales have come from such third countries, primarily those in the Far East. For alternative managers UCITS became of greater interest following the broadening of the investment opportunities available to them and clarification in this regard further to the "UCITS III" regulatory reforms2 and the Eligible Assets Directive3. Steady growth of alternative UCITS, typically called "Newcits", has been evident in the years since then and the number of such UCITS hedge funds now exceeds 1,000. As the majority of such funds launched post the financial crisis of 2008 it is evident that the growth trend in the alternative sector of the UCITS market is accelerating and this is being driven by investor demands for regulated products that afford greater liquidity and transparency, as well as the potential for higher returns and access to alternative strategies offered by traditional hedge funds. As a result alternative managers, many of whom traditionally only operated funds in the offshore sector4, are increasingly considering launching UCITS and this article seeks to highlight a range of the key issues for such managers when they determine to launch UCITS. New Establishment or Conversion? It is generally possible to simply convert an existing alternative fund structure into a UCITS (a "Conversion"). However, in addition to undergoing the relevant UCITS authorisation procedures of the appropriate local EU regulator, such as the Central Bank of Ireland (the "Central Bank"), this may require the redomiciliation of the structure in accordance with relevant legislation such as Ireland's Companies (Miscellaneous Provisions) Act 2009 where the fund was originally domiciled offshore. Managers contemplating entering the UCITS space who already have a range of existing hedge funds must therefore initially determine whether to engage in a Conversion or to simply establish a new separate standalone entity and to maintain their existing, possibly offshore, structures intact - typically referred to as operating a "side by side" or co-domiciliation strategy. In practice, the predominant pattern to date has been for separate standalone entities to be newly established where alternative managers enter the UCITS market, particularly in cases where a redomiciliation would be required. Key reasons many managers have determined to adopt this approach include the fact that the range of investment restrictions applicable to UCITS will typically require extensive amendments to the fund's investment policy and contractual arrangements and result in a new cost structure which may reduce or distort the performance of an existing fund. Accordingly, it is often deemed preferable not to subject existing investors to such radical changes in case this triggers a wave of redemptions. However, it can be noted that a Conversion (whether carried out in conjunction with a redomiciliation or not) does have various advantages, including the retention of the existing corporate identity of the fund, the maintenance of existing contractual relationships and the avoidance of the costs of establishing a new legal entity or a potentially tax inefficient transfer of assets between funds. It would also permit a fund to retain its existing track record and listing history. In addition to highlighting key issues for offshore alternative managers when they determine to launch UCITS, therefore, this article will identify the issues which may create differences in performance, structure and risk profile between an alternative UCITS and the same investment manager's sister non-UCITS products in a side-byside fund range. Implications for the Investment Manager Investment managers are typically subject to regulation in the country in which they are located. Accordingly in many cases investment managers may be able to avail of exemptions applicable under local law from any requirement to be regulated where they are only providing management services to unregulated offshore funds. On the other hand, a UCITS home state regulator will generally require entities that wish to provide discretionary investment management services to such products to be regulated regardless of the jurisdiction in which they are located so alternative managers wishing to enter this market may find that they themselves need to obtain some form of regulatory authorisation. Switzerland is an example of a country which specifically introduced certain regulations some years ago in order to address this issue for local investment managers wishing to service UCITS which were not previously required to be regulated locally. One option where obtaining regulatory approval presents an issue may be for...

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