S P O N S O R E D F E AT U R Ehfm focus small & start-up funds

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q&a with Olivier ScialeS, chevalier & ScialeS

HFMWEEk (HFM):WHy iS LUxEMbOURg cURRENTLy SO iMPORTANT TO THE HEDgE FUND SEcTOR?

OLiviER SciALES (OS): Since the introduction of Specialised Investment Funds (SIFs) in February

2007, Luxembourg has emerged as an important centre for onshore, regulated alternative fund vehicles, which promise to become the norm for European institutional investment once the EU’s Alternative Investment Fund Managers (AIFM) Directive takes effect in 2013. There were a total of 1,244 SIFs – which are also used for private equity, property and other alternative vehicles – at the end of March 2011, including more than 1,000 established since the SIF legislation came into force.

The grand duchy’s regulator, the CSSF, now has extensive experience in supervising alternative funds, while law firms and service providers such as administrators, custodians and auditors have built up their expertise in the area over recent years. One should not underestimate the importance of Luxembourg’s traditional Ucits fund industry, the largest in Europe, amid the convergence of hedge fund strategies and traditional investment management. Many fund firms carry out both activities in Luxembourg.

HFM: TWO yEARS ON FROM THE cREDiT cRiSiS, WHAT PROcEDURES HAvE bEEN bROUgHT iN TO iNcREASE TRANSPARENcy AND iNvESTOR SEcURiTy?

OS: Luxembourg has sought to move in tandem with its European partners in improving investor

protection and information, for example through the implementation of the AIFM Directive. However, in March 2009 the CSSF established new rules, including a fast-track authorisation procedure, governing the creation of side-pockets for illiquid assets.

In the wake of the crisis, the Association of the Luxembourg Fund Industry (ALFI) drew up a code of conduct designed to provide boards of directors with a framework of high-level principles and best practice recommendations for the governance of investment funds. The code is designed to cover all Luxembourg funds regulated by the CSSF, whether they are listed or unlisted and aimed at retail or professional investors.

HFM: WHAT ROLE ARE UciTS-cOMPLiANT HEDgE FUNDS PLAyiNg iN THE cURRENT MARkET? iS THERE AN UPSWiNg iN iNvESTMENT iN THESE STRUcTURES iN LUxEMbOURg?

OS: As Europe’s main centre for Ucits and with a growing alternatives business, Luxembourg

is a logical domicile and service centre for so-called ‘Newcits’. Many fund groups have Luxembourg management companies and local fund-servicing relationships. Anecdotal evidence suggests that the grand duchy is home to as much as 60% of all alternative Ucits funds.

An important growth driver is the investment policy of many institutions, which favour investment through Ucits structures, as well as continuing uncertainty about the detailed provisions of the AIFM Directive, which is awaiting the draft of Level 2 measures. Alternative managers also can reach a broader investor base in Europe through the Ucits ‘passport’, and benefit from the substantial regulatory acceptance and investor popularity of Ucits in other regions such as East Asia, Latin America and the Middle East.

Not all alternative strategies are suited to the regime – witness the closure of the $630m onshore version of BlueCrest Capital’s BlueTrend fund because of tracking error issues – but the roll-out of Ucits funds by managers such as Paulson, Traxis and GLG Partners over the past year indicates their wide acceptance among leading hedge fund firms.

HFM: WHAT FUTURE OPPORTUNiTiES ARE REPRESENTED by THE ARRivAL OF THE UciTS iv LEgiSLATiON?

OS: From July 1, Ucits IV will offer significantly easier arrangements for the cross-border

distribution of Ucits funds, which will no longer depend on authorisation from the regulator of the target market. Alternative as well as traditional Ucits will benefit from quicker time to market. Managers may also enjoy cost savings from ‘efficiency’ measures introduced by Ucits IV, including the ability of management companies to provide services to funds in other EU states and cross-border fund merger provisions.

Olivier Scialesis a founding partner of the law firm chevalier & sciales. he specialises in investment fund work focusing mainly on the structuring and implementation of investment funds. he has been recommended and recognised by various publications in the field of investment funds, such as the Guide to the world’s leading Investment fund lawyers and plc.

focus on

intrOductiOnluxembourg is well known for being europe’s largest fund centre and a world-wide leader in cross-border fund distribution. what is less well known, however, is that, in addition to traditional mainstream funds, luxembourg is also a leading european centre for hedge, real estate and private equity funds. according to european fund and asset management association (efama) figures, luxembourg is the second biggest fund domicile for regulated european non-ucits funds behind Germany.

obviously the upcoming aIfm directive will provide a lot of constraints for the industry, which have been extensively commented upon, but it will also provide opportunities to replicate the success that we saw with ucits into the alternative space. so while many are still trying to find ways to fight that new regulation, we believe it wiser to prepare for it and provide input to the eu commission and esma on the main implementing measures that are still to be finalised.

luxembOurg

Charles Muller after studying law in paris and london, charles muller became a luxembourg barrister and worked for Banque Générale du luxembourg. In 2003, charles joined alfI, where he is now deputy director general. charles also sits on the management committee of efama and the Board of efrp.

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HFM: HAvE yOU SEEN AN iNcREASE iN REDOMiciLiA-TiON FROM OFFSHORE LOcATiONS TO LUxEMbOURg? HOW DO yOU ExPEcT THiS TO iNcREASE?

OS: Luxembourg offers a range of techniques allow-ing funds from other jurisdictions to be redomiciled

to the grand duchy, including contribution in kind of a fund’s assets, the transfer of the registered office of the offshore fund or its merger into a Luxembourg fund. There has been extensive interest in Luxembourg structures from managers of offshore funds, but they are adopting a range of options including the use of feeder funds and the crea-tion of parallel onshore vehicles, whether Ucits or SIFs.

HFM: FiNALLy, HOW iS LUxEMbOURg DEvELOPiNg TO MEET THE HEDgE FUND iNDUSTRy’S NEEDS AND HOW HAS THiS DEvELOPMENT bEEN iNFLUENcED by REgULATORy cHANgES, SUcH AS THE AiFMD?

OS: Luxembourg anticipated the demand for greater regulation of alternative funds, which has

now been reflected in the AIFM Directive with the SIF regime. Its success since 2007 reflects the importance to European investors in particular of regulated vehicles and effective supervision. Luxembourg firms have extensive experience of servicing highly regulated Ucits vehicles, and rules developed for the retail market have influenced the drafting of alternative fund regulation, while Ucits V will bring the regime’s depository rules into line with those in the AIFM Directive. n

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