QIF Growth to Accelerate in 2012
After a 2011 characterised by turbulent markets, the Eurozone crisis and an ever-increasing regulatory burden, many in the European asset management space will hope for a more benign 2012. Yet despite the recent cloud of unfavourable conditions, the Irish funds industry continues to provide a silver lining through its steady and consistent growth. The more than €1.8 trillion of assets serviced in Ireland now includes, for the first time, more than €1 trillion of assets in Irish-domiciled funds, an increase of 62% since the 2008 financial crisis. We synopsise below the catalysts for this impressive growth amid a troubled economic landscape, and flag the key trends and challenges on the horizon.
In the UCITS arena, Ireland was by a substantial margin the UCITS domicile of choice for 2011, receiving the highest inflow of net assets in the EU (more than two and a half times that of any other jurisdiction) and now representing 13% of the overall UCITS market. This growth is partly attributable to the increased investor demand for alternative/ hedge strategies which carry the highly-regarded UCITS badge of approval. As a hedge fund centre of expertise (administering over 40% of global alternative assets), Ireland is ideally positioned to house these new products.
In addition, Ireland has carved a niche in servicing exchange-traded funds (ETFs), catering for 32% of the EU ETF market. The recent paper from ESMA has put ETFs and structured products under the spotlight but this has not to date resulted in a significant slowdown of these product launches.
Overall though, we anticipate continued growth in UCITS assets, as the practical benefits of UCITS IV (such as the ability to consolidate UCITS and foster economies of scale, and the reduction of procedural barriers to cross-border marketing) begin to be availed of, and an appreciation of UCITS marketing potential spreads among Asian and US managers. Indeed this expected expansion is reflected in the Irish Funds Industry Association’s recent opening of representative offices in Tokyo, Singapore, Chicago, Boston and Atlanta.
From a regulatory perspective, the industry will remain busy completing the implementation of UCITS IV, notably the 1 July deadline to replace every simplified prospectus with a new Key Investor Information Document, and the overlay by existing self-managed investment companies of the remaining new management/ conduct of business requirements before 1 July 2013. Further in the distance looms UCITS V, which aims to address critical issues including depositary liability standards, manager remuneration and the UCITS eligibility of complex products. This is sure to command much attention in the coming year.
2011 was also a benchmark year for the Irish alternative funds industry, in which the Qualifying Investor Fund (QIF) product - the most flexible category of Irish regulated fund and therefore the most suitable for hedge/ alternative strategies - grew 18% to a record €165 billion of assets under management.
We believe that in general terms, this increase reflects increasing allocations by pension funds/ institutional investors towards hedge funds, and a correspondingly greater portion of hedge fund target investors which now require- or at least prefer- an onshore regulated product.
A more specific reason for the QIF’s heightened popularity though is the imminent impact of the Alternative Investment Fund Managers Directive (AIFMD). ESMA’s recent advice to the European Commission regarding AIFMD implementation has partially eased concerns about the continued viability of selling non-EU funds to EU investors. Nevertheless, the continued uncertainty surrounding the Commission’s final rules has prompted some managers to err on the side of caution and seek to establish new products within the EU. The QIF already satisfies the key AIFMD requirements and has therefore been a major beneficiary of this approach. Of course for many managers, particularly within the US, the Cayman Islands/ British Virgin Islands offshore model continues to be the preference. We have accordingly noted a trend of managers hedging their bets by replicating their existing offshore funds with new complementary Irish products, rather than definitively choosing one jurisdiction over another: it is more a case of co-domiciliation than re-domiciliation.
Another noteworthy trend has been the growth in managed account platforms. The transparency, control and liquidity advantages of managed accounts have prompted a number of large institutions to restructure how they gain exposure to underlying managers. Typically this involves the institution disinvesting from underlying hedge funds, establishing and seeding a series of legally segregated QIFs, and appointing each underlying manager as portfolio manager of its own dedicated fund. We anticipate that this trend will accelerate and, allied to the AIFMD considerations above, will result in significant further growth of the QIF in 2012.
2011 may have been a year to forget on a macroeconomic level, but the Irish funds industry performed remarkably well in the circumstances. We see enough potential in both the UCITS and alternatives spaces to be confident that 2012 will bring more of the same.