ucits 14-15

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U C I T S 2 0 1 4 - 1 5WEEKHFM

S P E C I A L R E P O R T

FLEXIBLE LIQUIDITYWhat makes alternative Ucits attractive to new investors

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REGULATIONInvestors reassured by Ucits brand

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H F M W E E K . CO M 3

lternative Ucits have enjoyed another year of significant growth and commentators have predicted that this trend will continue.

In the latest HFMWeek Ucits Report

we speak to leading business experts to discuss their views on the latest developments in the liquid investment space.

In this report we analyse how managers in this fast growing sector are having to think carefully when choosing between the mature Ucits fund structure or taking advantage of the introduction

of the AIFMD, or perhaps using both structures. We also discuss the regulatory changes brought on by Ucits V, meant to stop a repeat of the abuses in previous years, and how specific jurisdictions such as Ireland are developing their corporate structure regulation, by introducing the ICAV, to allow the easy transition of plc companies to ICAVs.

Finally, we highlight and examine the many challenges, misconceptions and pitfalls that Ucits managers must navigate in order to be successful in this space.

Drew NicolReport editor

AU C I T S 2 0 1 4 - 1 5

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REPORT EDITOR Drew Nicol T: +44 (0) 20 7832 6659 [email protected] HFMWEEK HEAD OF CONTENT Paul McMillan T: +44 (0) 20 7832 6622 [email protected] HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Eleanor Stanley, Luke Tuchscherer CEO Charlie Kerr GROUP COMMERCIAL MANAGER Lucy Churchill T: +44 (0) 20 7832 6615 [email protected] SENIOR PUBLISHING ACCOUNT MANAGER Tara Nolan +44 (0) 20 7832 6612, [email protected] PUBLISHING ACCOUNT MANAGERS Amy Reed T: +44 (0) 20 7832 6618 [email protected]; Jack Duddy T: +44 (0) 20 7832 6613 [email protected]; Alex Roper T: +44 (0) 20 7832 6594 [email protected] CONTENT SALES Tel: +44 (0) 20 7832 6511 [email protected] CIRCULATION MANAGER Fay Muddle T: +44 (0) 20 7832 6524 [email protected]

HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group © 2014 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher

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BANKING

THE RISE AND RISE OF THE DEPOSITARY: UCITS VMiguel Attard, of Sparkasse Bank Malta, talks to HFMWeek about the regulatory changes that Ucits V will bring to further protect investors’ deposits

FINANCIAL SERVICES

UCITS GROWTH: 2014 AND BEYOND Cyril Delamare, CEO at ML Capital, talks to HFMWeek about how alternative Ucits funds have grown in popularity and where the opportunities for this fund type are

INVESTMENT BANKING

GOLDMAN SACHS: RISING TO THE UCITS CHALLENGENeha Jain and Laura Elliott, executive directors at Goldman Sachs, speak to HFMWeek about how the Goldman Sachs Ucits platform has fared in a rapidly expanding market

FUND MANAGEMENT

UCITS GOING FROM STRENGTH TO STRENGTHCyrus Amaria, deputy head of alternatives at Lyxor, talks to HFMWeek about the success of Ucits and how the sector will change with the introduction of AIFMD

LEGAL

ICAV – A TAX EFFICIENT CORPORATE STRUCTURE FOR IRISH INVESTMENT FUNDS Carol Widger and Ciara O’Leary, of Maples and Calder, speak to HFMWeek about the introduction of the ICAV and the process of converting Irish public limited companies to ICAVs

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4 H F M W E E K . CO M

U C I T S 2 0 1 4 - 1 5

HFMWeek (HFM): Goldman Sachs entered the Ucits market in 2007. How has your off ering evolved?Neha Jain (NJ): Since the inception of our platform in 2004, we have aspired to be a best-in-class provider of liquid alternative solutions. Th is was in response to our clients demanding high-quality, cost-effi cient invest-ments implemented in transparent, liquid and appro-priately regulated wrappers. Th e platform has evolved signifi cantly over the last decade and currently off ers a broad spectrum of investable products including Ucits hedge funds, managed accounts, rules-based strategy funds and bespoke portfolios.

Entering the Ucits market in 2007 was a natural evolu-tion of our off ering, and in line with our long-term vision for the alternative investment market. Our early Ucits products were entirely systematic (i.e. rule-based) as our clients looked to capture risk premia across asset classes in a transparent and low-cost implementation.

Laura Elliott (LE): Th e Ucits hedge fund off ering, add-ed in 2011, is complementary to the rest of our off ering

and leverages the fi rm’s strategic and longstanding hedge fund manager relationships. As noted in a recent survey by a market participant, the alternative Ucits industry has maintained an impressive compound annual growth

THE UCITS HEDGE FUND OFFERING, ADDED IN 2011, IS COMPLEMENTARY TO THE REST OF OUR OFFERING AND LEVERAGES THE FIRM’S STRATEGIC AND LONGSTANDING HEDGE FUND

MANAGER RELATIONSHIPS

”

NEHA JAIN AND LAURA ELLIOTT, EXECUTIVE DIRECTORS AT GOLDMAN SACHS, SPEAK TO HFMWEEK ABOUT HOW THE GOLDMAN SACHS UCITS PLATFORM HAS FARED IN A RAPIDLY EXPANDING MARKET

GOLDMAN SACHS: RISING TO THE UCITS CHALLENGE

I N V E S T M E N T B A N K I N G


rate of nearly 30% over the last fi ve years and currently stands at a record high of $275bn across more than 1,000 funds. Our hedge fund clients are keen to participate in this growth story and gather assets from Europe. We have recently supplemented our off ering with a dedi-cated asset raising service, making the GS off ering a turn-key solution for hedge fund managers looking to launch Ucits products.

HFM: Given you started later than your competitors, what has been the reception to your platform?NJ: We have been close to the Ucits investor base for several years and continue to build assets in our broad Ucits off ering. Th ere is a well-acknowledged lack of sup-ply in the Ucits hedge fund market and hence investors are naturally pleased to have more products addressing this particular gap. We’re in an exciting growth phase in our business as we look to multiply our off ering and in-vestors particularly appreciate the opportunity to infl u-ence the content on our shelves at this early stage in our development. Our hedge fund clients are also pleased to see Goldman Sachs more active in this space.

HFM: How does the Goldman Sachs Ucits platform stand out from the other off erings available?NJ: We are looking to build a broad liquid alternatives platform that allows access to hedge fund managers, sys-tematic strategies and other alternative investments in a transparent, liquid and cost-effi cient format. We believe that by having a broad and fl exible product range we can create the right mix of investment opportunities to meet the diverse needs of the clients that we service. As the race for returns intensifi es, we are cognisant of the pres-sure on costs and fees. Our key focus is effi cient imple-mentation, varied access and targeted distribution.

LE: Th e fi rm’s strong relationships with hedge funds al-low us to reach out to and connect with a wide range of managers across the US, Europe and Asia. We hope to bring the Ucits brand to prominent hedge fund manag-ers globally and therefore expand the products available within the Ucits market. We view the platform as a part-nership with our hedge fund clients and hence give the manager control over the brand and growth of the fund, while generating direct, strong relationships between the manager and underlying investors.

NJ: Our approach to investors in the Ucits market is so-lution-driven. We are looking to investors for guidance on what they would like to see in Ucits format and work towards creating products that fi t client portfolios. We believe that the sustained success of the platform will be driven by: the quality of the products we off er, the calibre of the hedge fund managers we can att ract and the merit of our systematic strategies. Th is is where we aim to dif-ferentiate ourselves.

HFM: What challenges have you faced so far in the Ucits space?LE: As investors seek more complex products, we think that one of the challenges will be continuing to ensure that the liquidity profi le of underlying products is in line

with Ucits regulations. It is essential, in our opinion, that asset managers and platforms are thoughtful about their fund launches, and therefore about protecting the Ucits reputation and brand. Issues such as costs of compliance and future regulatory changes also remain key discussion points.

HFM: How do you feel the market is developing and what changes do you expect to see in the next year? LE: Propelled by regulatory requirements and a rising demand for liquid alternatives, we believe that the indus-try is at the threshold of expansion – across styles, ge-ographies and investor types. We are increasingly seeing more US and Asian managers asking about Ucits. While this market has been dominated by equity long-short strategies so far, we expect to see strategies, such as dis-cretionary macro and credit, enter the Ucits market in the next year.

NJ: We are also seeing a greater proportion of institu-tional investors gravitating towards this market, and we expect this trend to continue over the coming year. With

changes in regulations for distributors across Europe, we expect a renewed focus on Ucits funds from this client base as well. We think that Ucits is well-poised to be a bigger and more credible brand, as more quality manag-ers and diversifi ed strategies enter this space.

HFM: What aspects of Goldman Sachs’ Ucits plat-form are you hoping to develop in the future?LE: Over the next six to 12 months, we hope to grow and develop our pipeline of managed products across regions. US-based managers launching Ucits funds have seen success in the recent past and we look forward to participating in that business. Asia is a relatively new piece of the puzzle and one that we are looking to ex-plore more fully. We are continually meeting managers at conferences and one-on-one meetings to hear their thoughts on off ering Ucits compliant strategies.

NJ: Additionally, and in line with our mission to be a provider of liquid alternatives, we are also looking to launch a range of systematic strategies in Ucits fund for-mat across asset classes.

WE HAVE ASPIRED TO BE A BEST-IN-CLASS PROVIDER OF LIQUID

ALTERNATIVE SOLUTIONS

” Laura Elliott is an executive director in Goldman Sachs’ Global Fund Solutions business. She is responsible for managing the third-party manager platform, across onshore (Ucits) and offshore funds. She joined Goldman Sachs in 2004 and has over 10 years of experience in a variety of roles within the hedge fund industry.

Neha Jain is an executive director in Goldman Sachs’ Global Fund Solutions business, and is responsible for distribution of all fund-related content into Europe. She focuses primarily on Ucits funds across third-party managed products and internal algorithmic systematic strategies to both institutional and private client asset pools.


U C I T S 2 0 1 4 - 1 5

HFMWeek (HFM): How has the alternative Ucits space developed in recent years?Cyrus Amaria (CA): Since 2013 the alternative Ucits market has been one of the fastest growing markets, espe-cially in comparison to traditional off -shore hedge fund structures. For example, assets under management in the off -shore hedge fund industry are believed to be growing at 10-15% per annum. Th e growth for alternative Ucits is closer to 30-40% per annum and in some quarterly peri-ods that is up to 50%, which is phenomenal. Interestingly, there are now some hedge funds that have Ucits versions which are larger than their off -shore equivalents.

One of the major developments is the number of funds in the marketplace. While assets have grown signifi cantly since 2013, the number of funds has actually declined. Th is is a partly due to a regulatory change in February 2013 which restricted the use of fi nancial indices. Several funds had to restructure and ultimately many closed down.

At Lyxor, we launched three single manager Ucits funds in February 2013 – Winton, Canyon, and Tiedemann; all were aligned with the amendments in regulation. By the end of October 2014, we have achieved $1.2bn in net new sales and the vast majority of the infl ows have come in the 2014 calendar year.

Th e growth of our Ucits funds fi ts well with top-down views of investors both from the initial asset allocation perspective of having alternative exposure to diversify their portfolios and also down to the strategy decisions of allocating to specifi c hedge fund strategies such as merger arbitrage or credit long/short.

HFM: What is Ucits overall importance to the market and is there an element of ‘brand eff ect’ which stimu-lates their growth? CA: You can consider Ucits as having a brand eff ect and one way of acknowledging this has been the growth in as-sets outside of Europe. For example, the Lyxor Ucits funds, described earlier, have 10% of their AUM from Asia. Fur-thermore, investors in South America are known to have a strong preference for Ucits products. Th is is notable for a regulation that is European in nature.

Alternative Ucits has been gaining large traction for the regulated nature of the product. Investors have been ever more focused on the security of assets post 2008, where the Madoff fraud tainted much of the off -shore hedge fund industry. In addition, many investors are cautious of the liquidity events that happened during the 2008 fi nan-

cial crisis where a portion of off -shore hedge funds gated, sidepocketed, and even suspended NAV. Ucits funds have strict rules on liquidity and most funds typically trade with daily or weekly liquidity which favours an investor base that has a need for quick access to their assets, such as private banks.

Th e benefi ts of alternative Ucits such as liquidity and even transparency have brought a diff erentiated investor base into the hedge fund industry. In the last 10 years, in-stitutional investors, especially pension funds, have been major allocators to off -shore hedge funds; these investors still do not currently allocate to Ucits funds in a meaning-ful way. However, other investors such as private banks, wealth managers and asset managers are in the main re-sponsible for the growth of alternative Ucits.

HFM: Is there a danger of over-confi dence in this Ucits brand?CA: Clients may believe a regulated product is fail-proof, whereas we at Lyxor are very keen to explain to them that there is still a need to do thorough due diligence. For us that should be seen as the biggest concern in any mar-ket. Many people use the phrase ‘tried and tested’ to de-scribe Ucits but actually we would have concerns on such thoughts.

Firstly, the Ucits market is small in comparison to the off -shore hedge fund industry and that means you are comparing a very diff erent sample population. Secondly, the number of alternative Ucits that were in existence in 2008 was a fraction of the number today. Th e real stress test for investors was 2008 when market, liquidity and counterparty risk resulted in adverse scenarios for the ma-jority of assets and strategies.

While Ucits funds have liquidity guidelines, we feel that such guidelines need to be strictly monitored. Th e same would apply to market risks and counterparty risk. Lyxor has been in existence since 1998, we were founded on the basis of creating managed account solutions to investors. Managed accounts provide us, as the asset manager, with full transparency on all positions. We are able to risk man-age these positions, meaning we did not gate or sidepocket in 2008. It also resulted in the ability to manage counter-party risk on behalf of our investors by avoiding prime bro-kerage assets tied to the bankruptcy of Lehman Brothers.

Th is is the aspect of asset management that could be considered ‘tried and tested’. It’s vital that your hedge fund manager, asset manager or platform provider has that ex-

CYRUS AMARIA, DEPUTY HEAD OF ALTERNATIVES AT LYXOR, TALKS TO HFMWEEK ABOUT THE SUCCESS OF UCITS AND HOW THE SECTOR WILL CHANGE WITH THE INTRODUCTION OF AIFMD

UCITS GOING FROM STRENGTH TO STRENGTH

Cyrus Amaria is deputy head of Alternative Investments at Lyxor Asset Management. He joined Lyxor in February 2013 on the Managed Account Development team. Prior to this, he was a senior portfo-lio manager at Man Group in the multi-manager busi-ness for nine years. He is a CFA and CAIA charterholder.


F U N D M A N A G E M E N T

perience, what have they done during that crisis to prove themselves?

HFM: How do you think Ucits fund products will fare alongside AIFMD? CA: It is our belief that, going forward, alternative Ucits and AIFMD are completely compatible. The AIFMD regulation is very much going in the direction of a more institutionalised hedge fund industry and is specific to alternatives. In addition, there is no restriction on the strategies managers can employ or asset classes they can invest into. You should be able to do the same thing in the off-shore hedge fund world, as the AIFMD regulated world, bar some minor tweaks. For a European organisa-tion AIFMD has to be the standard going forward.

Lyxor is transitioning the off-shore man-aged account platform to an AIFMD on-shore jurisdiction. At the same time we will continue to launch further single manager alternative Ucits funds. This is because, for Ucits, we see a very different investor base as Ucits has the ability to appeal to the full range of investors. Meanwhile, for AIFMD we believe the target audience has to be those with professional status, such as pension funds, where liquidity is not one of the foremost criteria but rather full replication of a strategy is. If we were to launch a new strategy we would consider ei-ther an AIF or a Ucits structure, depending on the strategy of a manager. If a manager was very liquid and creating a Ucits format did not impact the strategy then it would be

a more appropriate structure to launch as this would give you the ability to deliver a product to the widest investor base.

HFM: Looking ahead, how will Lyxor’s strategy devel-op and what do you think the next trend in alternative Ucits will be? CA: We are working hard to bring the highest quality

managers into Ucits formats. In 2013 we launched three Ucits funds. We could have launched many more because of the sheer volume of managers seeing Lyxor’s success and approaching us on that basis. However, we are taking a very cautious stance. We know there is an extremely strong investor interest but we want to be very considerate about the quality of supply we are bringing to the market.

The next manager we are introducing is a long-short emerging market manager. We believe there are very few high-quality emerging market Ucits funds and the strat-egy is a diversifier to a traditional investor portfolio. Emerging markets also offer good performance potential and a hedge fund can

limit the volatility as well as the downside risks in emerg-ing markets. This fund, similar to all other funds on the Lyxor Platform, has been led by our investment view.

The biggest trend in alternative Ucits that we can expect to see in 2015 was something that was mentioned earlier, and that is a growing number of Ucits funds which are larger than their off-shore equivalent and will become the flagship vehicle of the manager.

WE KNOW THERE IS AN EXTREMELY STRONG INVESTOR INTEREST BUT

WE WANT TO BE VERY CONSIDERATE ABOUT THE QUALITY OF SUPPLY WE

ARE BRINGING TO THE MARKET

”


U C I T S 2 0 1 4 - 1 5

In July of this year, the Irish Government published the Irish Collective Asset-management Vehicle (ICAV) Bill (the Bill). Th e aim of the Bill is to cre-ate a new innovative and tax effi cient corporate vehicle for Irish investment funds. Th e key driver behind the ICAV is to create a separate and distinct

corporate fund regime that will simplify the creation and administration of investment funds in Ireland. Th e ICAV will have a number of advantages, particularly in regard to the tax treatment of the vehicle, over existing Irish fund vehicles, and it is anticipated that once the draft legislation is formally en-acted, which is anticipated to be by the end of 2014, that the ICAV will soon become the most popu-lar legal form for Irish funds and will further strengthen Ireland’s position as the domicile of choice for Ucits and Ucits investment managers.

WHAT IS AN ICAV?Th e ICAV will sit alongside the public limited company struc-ture, which has been the vehicle of choice for the majority of exist-ing Irish funds to date. It will also complement other available legal forms of Irish regulated funds which include the unit trust, lim-ited partnership and the common contractual fund and can be used in conjunction with these funds as master-feeders or parallel fund structures. Like other regulated fund vehicles, the ICAV will be established by way of a fi ling with the Central Bank of Ireland and can seek au-thorisation as either a Ucits or alternative investment fund (AIF).

WHO CAN USE AN ICAV?Th e ICAV will be available to both new and existing Ucits. Irish public limited companies will be able to convert to an ICAV following the Bill’s implementation. However, non-corporate entities such as unit trusts and common contractual funds will not be able to convert to an ICAV.

ADVANTAGES OF THE ICAVWhile it is of great advantage that an investment fund es-tablished as an ICAV will have its own specifi c legislative code and will not be impacted by amendments to certain pieces of European and Irish company legislation which are targeted at ordinary companies rather than investment funds, but which currently impact on Irish Ucits estab-lished as corporate funds, perhaps the greatest advantage the ICAV aff ords is in regard to its treatment for US tax.

An ICAV will be able to make an election under US ‘check-the-box’ tax rules, which will allow it to be treated as a partnership or a disregarded entity for US tax pur-poses, putt ing Irish Ucits on a par with the tax election available for Ucits established as Luxemburg SICAVs. Th is tax check-the-box election allows taxable US inves-tors to be in the same tax position as if they had invested directly in the underlying assets of the ICAV and will bring such US investors outside of the US Passive Foreign Company Investment Regime. Given the growth of interest with-in the US market in Ucits, this is a very welcome development as it will allow Ucits to further expand into the US market using a legal form that US investors and manag-

ers are more familiar with, thus overcoming some of the obstacles faced by unit trust structures (or limited partner-ships in the alternative space) which were previously the only form of Irish Ucits investment fund that could off er this type of tax treatment to US investors. US issues with the unit trust structure are well documented and while they did allow for a more favourable tax treatment, both US and other global investors were not overtly familiar with this type of vehicle, thus lessening the uptake of in-vestment in such vehicles. An added benefi t to the ICAV is that while it may choose, for US purposes, to be a tax trans-parent vehicle it will still generally be treated as a corpo-rate vehicle in most other jurisdictions, thereby allowing it to avail of the existing network of Irish double taxation

AN ICAV WILL BE ABLE TO MAKE AN ELECTION,

UNDER US ‘CHECK-THE-BOX’ TAX RULES, WHICH WILL ALLOW IT TO BE TREATED AS A PARTNERSHIP OR A

DISREGARDED ENTITY FOR US TAX PURPOSES

”

CAROL WIDGER AND CIARA O’LEARY, OF MAPLES AND CALDER, SPEAK TO HFMWEEK ABOUT THE INTRODUCTION OF THE ICAV AND THE PROCESS OF CONVERTING IRISH PUBLIC LIMITED COMPANIES TO ICAVS

ICAV – A TAX EFFICIENT CORPORATE STRUCTURE FOR

IRISH INVESTMENT FUNDS

Ciara O’Leary is a senior associate in the Investment Funds Group in Maples and Calder’s Dublin office. She advises on the establishment, authorisation, operation and maintenance of Irish regulated funds including Ucits and AIFs as well as advising on hedge funds.

Carol Widger is a partner in the Investment Funds Group in Maples and Calder’s Dublin office. Carol advises fund promoters and firms providing services to investment funds in relation to the establishment, launch and on-going management of all types of investment funds, including Ucits and AIFs.

L E G A L


treaties and the favourable tax treatment associated with dividends and gains on share transfers. The ICAV will also retain the full tax benefits of the Irish tax regime that are currently applicable to Irish investment funds.

While the tax treatment is the key advantage to the ICAV, the bill has introduced a number of other features which are favourable in comparison to the existing tradi-tional corporate vehicles.

Under the draft legislation, an ICAV will be permitted to prepare separate sub-fund accounts for individual sub-funds within an umbrella fund. This will be a very impor-tant feature for large multi-manager structures as currently Irish public limited companies have to produce one set of accounts for the entire umbrella which mandates a single year-end date and the ability of investors in one sub-fund to receive financial details for investors in others. In addi-tion, this feature also allows for greater flexibility in terms of which accounting standards can be used in the prepa-ration of financial statements, including IFRS, US GAAP, Irish GAAP, Japanese GAAP and Canadian GAPP, which allows for tailoring of the financial statements to reflect an investment funds particular investor base.

The ICAV is not subject to the principle of risk spread-ing (unlike the current corporate vehicles which must spread investment risk) which will facilitate single-asset deals. In the case of changes to the ICAV’s instrument of incorporation (IoI) there will be no requirement to obtain prior investor approval where the ICAV’s appointed de-positary certifies that changes to the IoI do not prejudice the interests of investors (similar to the requirements relat-ing to changes to the trust deed of a unit trust).

A final advantage is that the draft legislation seeks to re-flect the realities of how investment funds operate in prac-tice. Directors of open-ended ICAVs (ICAVs established as Ucits will always be open-ended) are permitted to elect to dispense with the holding of an annual general meeting (AGM) by giving written notice to all of the ICAV’s share-holders. There is a safeguard in that shareholders holding 10% or more of shares can demand an AGM. ICAVs will also be exempt from making the various filings currently

required under Irish company law to the Companies Reg-istration Office (the registrar for companies in Ireland) (the CRO), again lessening much of the administration burden on Irish funds.

A final point to note in regard to the introduction of the ICAV is that in line with existing Ucits vehicles, an ICAV may be established as either a single fund or as an umbrella structure with a number of sub-funds and share classes. The draft legislation specifically provides for robust segregation of liability between sub-funds in an umbrella vehicle.

CONVERSION OF IRISH PUBLIC LIMITED COMPANIES TO ICAVThe Bill allows an Irish public limited company to convert to ICAV status by way of continuation. In order to do so a filing will be required to be made with the Central Bank, including the Irish public limited company’s current and intended constitutional documents, together with a statu-tory declaration of a director confirming, among other matters, the solvency of the Irish public limited company which must be verified by an independent party and con-senting to the proposed conversion. As the conversion will require amendments to a company’s existing constitution-al documents, shareholder consent will be required. Once the Central Bank has received all the necessary documen-tation in respect of a conversion, the Central Bank will then issue a certificate of registration and publish a notice stating that the company has changed its status from that of a public limited company to an ICAV with the CRO.

The Irish funds industry has welcomed the new ICAV structure as confirming Ireland’s commitment to being a competitive domicile for investment funds. The new leg-islative regime will include lower administration costs, the ability to check the box in the US, the removal of the obligation to spread risk, the ability to dispense with the holding of an AGM, the preparation of sub-fund accounts and the option to choose the preferred accounting stand-ards all combine to ensure the new ICAV will streamline the process of establishment and administration of funds and has the potential to become the vehicle of choice for Ucits in Europe.

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A FORMER PORTFOLIO

manager at Hutchin Hill is

starting a new hedge fund in

London named Decca Capital

and has hired seasoned opera-

tions specialist Doug Shaw as

COO.HFMWeek has learned that

Shahraab Ahmad, who spent

five years managing a liquid

credit strategy for the $2.5bn

firm, plans to start trading with

his new firm near the start of

next year.

Ahmad, who left Hutchin

Hill in June 2013, is work-

ing with Shaw, an eight-year

BlackRock executive who rose

to prominence defending the

UK’s hedge fund sector fol-

lowing the financial crisis in an

appearance before the Treasury

Select Committee.

The pair met through an inves-

tor who was allocated to both

Hutchin Hill and BlackRock.

Prior to spells there as head of

alternatives, fundamental equi-

ty COO and head of charities,

Shaw worked for Chris Hohn’s

TCI and Gartmore Investment

Management.

Decca’s senior team is com-

pleted by Razvan Frumosu,

who will lead business devel-

opment. He has previously

worked in various roles for

Société Générale, JP Morgan

and Bank of America.

Ahmad has relocated

Shahraab Ahmad building

new London-based firm with

former BlackRock COO

BY WILL WAINEWRIGHT

03

COMMENT M A K E S U R E Y O U A R E U P TO D AT E O N F ATC A14

Ex-Hutchin Hill

manager launches

Decca Capital

HFMWEEK MEETS

THE SEC

AN EXCLUSIVE INTERVIEW WITH

TOP SEC EXAMINERS ON THE

MAIN REGULATORY ISSUES FOR

HEDGE FUND MANAGERSFEATURE 19

The long and the short of it

ISSUE 356 9 October 2014

NEWS 10

13-YEAR MORGAN STANLEY VET LEADS LONDON LAUNCH

Steven Cress wins Trium Capital’s biggest seed ticke

t so far

NEWS 03

PROTEST IMPACT UNSETTLES HONG KONG HEDGE FUNDS

Professionals have “wait and see” attitude, says one COO

NEWS 05

MOORE CAPITAL HIRES SAC’S FORMER LONDON COUNSEL

Famida Daniels joins ex-colleagues recruited earlier this year

WHERE BANKS

FEAR TO TREAD

FEATURE 16HFMWeek investigates how managers

are filling a hole left by the bank

pull-back from traditional lending

s indd 1

07/10/2014 15

www.hfmweek .com

HEDGE FUND MANAGERS

and leading investors have hit

out at new leverage calculations,

warning they will cause confu-

sion and misrepresent the risk

of investing in certain strategies.

The AIFMD prescribes dis-

closing leverage using the gross

method, which requires report-

ing all positions with almost no

netting off or hedging, and the

commitment method, which

permits some netting off of cer-

tain hedges but many criticise it

for being too narrowly defined

to be useful.Many non-EU managers mar-

keting into the EU are just real-

ising they also have to declare

typical and maximum leverage

using the gross and commitment

methods in both initial Variation

of Permission (VoP) applica-

tions, Annex IV and reveal this

information to investors.“We have consistently argued

that the gross and commitment

methods are inappropriate and

mislead investors,” said a spokes-

person at trade body Aima.CTAs, macro and relative

value funds are expected to be

hardest hit by the gross calcula-

tion as assets of $25m could be

viewed as assets of over $2bn

for these strategies due to the

lack of accounting for hedging

and netting.“The gross method of calculating will

Gross and commitment calculations fail to represent

true risk, say expertsBY MAIYA KEIDAN

03

COMMENT THE POST-CALPERS OPPORTUNIT Y FOR THE INDUSTRY 14

Market hits out at “misleading”

leverage method

GONE PHISHINGHOW CAN HEDGE FUNDS

PROTECT THEMSELVES AND

THEIR CLIENTS FROM EVER-MORE SOPHISTICATED

CYBER-ATTACKS?

FEATURE 18



NEWS 07

MANAGERS AWAIT ADMIN ANNEX IV REPORTING SUPPORT

Bespoke solutions developed as cost-saving solution

CLOSURE 03

CENTRAL BANK POLICIES BRING QUIRIS CAPITAL TO A HALT

Currency specialist returns client money

NEWS 05

CITI HEAD OF GLOBAL PRIME FINANCE DEPARTS

David Murphy’s exit follows several moves

THE ALTERNATIVE BETA CHALLENGE

FEATURE 16

Can strategic alternative beta

products really be as effective as –

and a threat to – hedge funds?001_003_HFM357_News.indd 1

21/10/2014 15:49

www.hfmweek .com

FCA REPORTING SYSTEM

Gabriel’s new platform for

accepting Annex IV reports is

causing confusion among man-

agers and is already blighted

with inefficiencies, say numer-

ous industry personnel.

The Gathering Better

Regulatory Information

Electronically (Gabriel) plat-

form started accepting Annex

IV reports from 20 October, but

just days in and there are several

concerns over its functionalities.

A major gripe is that because

Gabriel is operating on XML

version 1.1, an earlier Esma tem-

plate, the system does not allow

firms to input figures below

zero, asking for written explana-

tions of any negative data.

Neil Robson at Katten Muchin

Rosenman told HFMWeek:

“They say that within due course

the system will be revised to be

able to reflect negative positions

but at the moment it is going to

be a bit of a fudge.”

With the first reporting dead-

line looming on 31 January for

AIFMs who received authorisa-

tion in July, many fear the short

timeframe in which they have to

provide coherent information

for over 400 data fields.

“I raised the issue with the

FCA about the tight deadline

and they can’t do anything

because it’s regula-

tion,” said the COO at

UK system will not yet

accept negative numbers or

reports from non-UK AIFMs

BY CHRIS MATTHEWS

03

COMMENT WHAT CAN DEDICATED MANAGED ACCOUNTS OFFER? 14

Big concerns over

FCA Annex IV

reporting ‘fudge’

CREATING A FIRM

GOVERNANCE

MANAGEMENT BOARDS AT A

FIRM LEVEL CAN BE SEEN AS

A POSITIVE AND NEGATIVE BY

INVESTORS FEATURE 18



NEWS 07

NAYA CO-FOUNDER LAUNCHES LEGAL FIGHT OVER OWNERSHIP

Bruce Emery claims he is owed one third of business

NEWS 05

SAN DIEGO PENSION REDEEMS $376.1M FROM HEDGE FUNDS

Withdrawals hit Bridgewater, DE Shaw and AQR

NEWS 06

IMMERSION CAPITAL ADDS ZIFF TRIO TO LINE-UP

Peter Wansing, Francis Ng and James Vaughan join venture

MIDTERM

RELIEF?

FEATURE 16Would a Republican victory in the

Senate see a push to roll back

some Dodd-Frank requirements?

28/10/2014

www.hfmweek .com

THE HEDGE FUND sector is hopeful that last-minute chang-

es to the small print of new Basel III global capital rules

have prevented the prospect of huge increases in stock borrow-

ing costs. Final rules from the Basel Committee on upcoming Net

Stable Funding Ratio require-ments for banks, published last

Friday, contained a significant carve out for institutions offer-

ing securities lending services to hedge funds.Short-term repo borrowing

costs for trading with non-bank

entities have also been reduced through a lower required stable

funding ratio than originally proposed, although experts

warn charges will still rise. Lobby groups Aima and the

MFA had both been urging the Basel Committee to revisit the

new rules, warning that treat-ing stock borrowing as a loan

under the new calculations would have undermined the

ability of banks to provide such services to hedge funds. Some

lobby groups forecasted a five-fold increase in the cost of stock

borrowing.Under the final rules, due to be introduced in 2018,

stock lending transactions can be treated as neutral from a

funding requirement perspective as long as

But experts warn new rules will be open to local

interpretation BY MAIYA KEIDAN

03

COMMENT N U T S A N D B O LT S O F L E V E R A G E C O N C E R N S 14

Hedge fund sector welcomes Basel III NSFR carve out

MAKING HEDGE FUNDS LOOK CHEAPMORNINGSTAR ANALYST JASON KEPHART ON THE COSTS AND LACK OF TRANSPARENCY OF CERTAIN LIQUID ALTS

FEATURE 21


ISSUE 359 6 November 2014

CLOSURE 10

HERMES SHUTS FOHF ARM AND NEW YORK OFFICE

New multi-asset team will be led by Tommaso Mancuso

REGULATION 03

AIFMD PASSPORT ‘LIKELY’ TO GET NON-EU AIF EXTENSION

Industry vet confi dent of Esma recommendation next year

LEGAL 07

INVESTORS DROP MORNINGSTAR LAWSUIT OVER FUND FRAUD

High-profi le case saw investors lose $17m in ‘fi ve-star’ hedge fund

FE ATURE 16

Latest data on the top 20 admins, auditors, custodians and prime brokers

for SEC-registered hedge funds

SNAPSHOT

THE ALPHAPIPE-HFMWEEKSERVICE PROVIDER

Q 3 : 1 4

001_003_HFM359_News.indd 1

B A N K I N G


U C I T S 2 0 1 4 - 1 5

Ucits V is aimed at improving the protec-tions aff orded to Ucits investors, pre-venting a repeat of the abuses seen at the time of the Madoff scandal, and brings the Ucits framework into alignment with some of the provisions of the Alterna-

tive Investment Managers Directive (AIFMD) in an ef-fort to maintain the Ucits framework as a ‘gold standard for fund regulation globally’. Both the AIFM and Ucits directives have placed the role and function of the custo-dian/depositary at the preliminary stages when establish-ing a fund to the extent that any aspiring manager should no longer take it for granted that a custodian/depositary will be enthused to accept his business. Both Directives have placed an increased amount of monitoring, oversight and loss of asset liability and obligations that may impact a manager’s strategy simply to align risk to that of his custodian/depositary.

Th e weaknesses and lack of harmonisation of the depositary duties and liabilities across dif-ferent EU countries is also ad-dressed by Ucits V. In fact, the depositary rules have remained relatively unchanged since the original Ucits Directive was fi rst introduced in 1985, even though the framework had been revised several times over the years. Th e drive for new deposi-tary rules also came as a result of the enactment of the AIFMD which regulates the alternative investment funds sector and signifi cantly enhanced the investor protection regime for professional investors, thus making it all the more urgent to encompass the same level of investor pro-tection to retail fund investors.

Ucits V introduces and reinforces the concept of de-pository liability, thus tying in the liability provisions under the AIFMD. As a result, a depository will now also be liable for any loss of Ucits assets held in custody. Of particular importance is that if assets that are held in cus-tody are lost, a depositary is under a restitutionary obli-gation to replace such assets. A very limited exclusion is available that permits a depositary to exclude liability if it can prove that losses occurred as a result of an external

event beyond its reasonable control, the consequences of which could not have been avoided despite all reason-able eff orts to the contrary.

In addition, an all-encompassing duty of care for de-positaries is established by Ucits V, which provides that a depositary is liable to the Ucits and its investors for losses suff ered by them as a result of the depositary’s negligent or deliberate failure to properly fulfi l its obligations. Ucits investors are now also given a direct right of redress against the depositary, meaning they will not need to rely on the management company to enforce this right.

Ucits V affi rms a depositary’s liability for losses caused by its appointed sub-custodians by establishing that a depositary shall be liable for all losses by a third-party to whom the custody function has been delegated. In stark contrast to the AIFMD, Ucits V prohibits a depositary from discharging or transferring its liability to a sub-custodian. Ucits V represents a material change to the current standard of liability which requires a de-positary to be liable for losses re-sulting from the depositary’s in-defensible failure to perform its obligations or its improper per-formance of them.

Ucits V introduces new re-quirements in relation to the del-egation of safekeeping duties by

a depositary to sub-custodians. Th e new requirements generally relate to the operation of sub-custodians and require that sub-custodians:

(i) Have the structures and expertise that are adequate for the safekeeping of the assets that are entrusted to them;

(ii) Are subject to eff ective prudential regulation and regulatory supervision;

(iii) Are subject to an external periodic audit (iv) Take all the necessary steps to ensure that in the

event of the sub-custodians’ insolvency, the assets of the Ucits are not available for distribution to creditors

Furthermore, the depositary should not delegate its safekeeping duties unless it can demonstrate that:

(i) Th ere is an objective reason for the delegation of its duties

THE WEAKNESSES AND LACK OF HARMONISATION

OF THE DEPOSITARY DUTIES AND LIABILITIES ACROSS

DIFFERENT EU COUNTRIES IS ALSO ADDRESSED BY

UCITS V

”

MIGUEL ATTARD, AT SPARKASSE BANK MALTA, TALKS TO HFMWEEK ABOUT THE REGULATORY CHANGES THAT UCITS V WILL BRING TO FURTHER PROTECT INVESTORS’ DEPOSITS

THE RISE AND RISE OF THE DEPOSITARY: UCITS V

Miguel Attardis a compliance officer at Sparkasse Bank Malta plc. He started off at a junior level within the Wealth Management Department before being offered the post of heading the compliance function of the bank. His areas of expertise are custody and compliance issues in matters related to banking, AIFMD and Ucits.

B A N K I N G

1 2 H F M W E E K . CO M

U C I T S 2 0 1 4 - 1 5

(ii) It has exercised due skill and care in the selection and continuous and comprehensive ongoing monitoring of the sub-custodian;

(iii) Surprisingly, the delegation is not made with the intention of avoiding the require-ments of Ucits V.

Given the quasi-strict liability imposed on depositaries for the loss of assets by sub-cus-todians and the prescriptive requirements as to the delegation of duties, it is expected that depositaries will enhance their due diligence and ongoing monitoring requirements of sub-custodians. They investigate operational procedures, such as how assets are held, how clearance and settlement takes place, how a sub-custodian links with its local central se-curities depository, and what safeguards are in place to prevent bankruptcy, fraud or em-bezzlement. Fees will now take into account a countless number of factors, including the types of assets being held, the settlement sys-tems used, the markets assets are traded on, the credit rating of the sub-custodian, the de-positary’s relationship with the sub-custodian and overall assessment of risk in the delegation of safekeeping duties.

Apart from the duties and obligations just mentioned, there are other depository provi-sions, where a depository is subject to asset verification and cash flow monitoring obliga-tions with regards to assets that are not held in custody which have come about as a result of the implementation of the AIFMD.

So what’s new and different from the status quo? For Sparkasse Bank Malta plc, not much, as we have been doing what is expected of de-positories for many years now, before it even became an obligation. But with AIFMD and Ucits V now holding global custodians, which would serve in the new expanded role of de-positaries to a far higher standard of liability, the banks and their boards of directors have reason to be anxious about whether they’re doing enough.

Here’s why: if the sub-custodians were to lose client assets due to incompetence or negligence, the deposi-tory is obliged to fill the gap. The same applies for assets held at a prime broker or even a transfer agent. It does not matter whether or not the depository was at fault. To potentially reduce this liability, the depositary must be able to prove it did its best to mitigate the loss of assets. There is no way of avoiding or discharging this ‘strict li-ability’.

Bottom line: contractual changes are in the works for agreements with sub-custodians and brand new ones are being designed for prime brokers. Global custodians have always claimed to be selective about who they do business with, and they now have to be all the more cau-tious about who they have selected as their sub-custo-dians. After all, billions, if not trillions of euros worth of clients’ assets are at stake.

BOTTOM LINE: CONTRACTUAL CHANGES ARE IN THE WORKS FOR AGREEMENTS WITH SUB-CUSTODIANS AND BRAND NEW

ONES ARE BEING DESIGNED FOR PRIME BROKERS

”

F I N A N C I A L S E R V I C E S


U C I T S 2 0 1 4 - 1 5

HFMWeek (HFM): What is the opportunity today for alternative Ucits and where do you see the growth in liquid alternatives?

Cyril Delamare (CD): The liquid alternatives industry is currently one of the fastest growing segments across the globe from an investment perspective and has come a very long way in a few short years post crisis. Highlighted across a number of industry sources, alternative Ucits AUM today stands in excess of $250bn and is predicted to continue its rapid growth of 30% per annum year-on-year.

At ML Capital we believe that the greatest opportunity for future asset raising clearly lies in the alternative fund industry’s ability to attract mainstream investors into their funds. There is currently over $7trn of assets being managed within Ucits and some leading in-dustry commentators believe that alternative Ucits strategies could represent 20-30% of all Ucits asset within 10 years.

The forecasted meteoric growth in alternative Ucits represents an excellent opportunity for alterna-tive managers to venture into the European regulated space and reach a new pool of investors who focus solely on regulated funds.

HFM: What factors should dictate a manager’s decision to launch a Ucits or AIFMD fund structure?

CD: The underlying strategy of a product really dictates whether a manager should launch a Ucits or AIFMD fund structure. If you look at the various different asset classes, there is a clear divide between Ucits compliant and non-compliant strategies. In our view, a manager running a sufficiently liquid strategy that can operate within the Ucits bounda-ries should always launch under Ucits.

Ucits as a brand has significant global investor demand, something that has been built over a number of decades. By contrast, AIFMD as a brand is very much the new kid on the block, its journey only just beginning.

While we see a clear place for non-Ucits regulated funds – that can be freely marketed across Europe, only when in-vestors actively start seeking out these fund structures will AIFMD be able to stand shoulder to shoulder with Ucits.

HFM: What are the key considerations to marketing Ucits funds in Europe?

CD: A common misconception of many hedge fund man-agers is that by launching an alternative Ucits fund you are immediately open for public sale in the key markets in Europe. The reality is far from this and a lot of work needs to be given to country registrations, tax reporting in key markets and access to key platform providers that control so much of the investor flow.

Once ready operationally you need to have the resourc-es at your disposal to sell the fund – resources that under-stand the intricacies of each of the core markets, have the ability to converse in the native language and have access

to the key decision makers.

HFM: Which countries are key sources of investor flow, in Eu-rope and further afield?

CD: The largest flows into alter-native Ucits today from within Europe are from the UK, France, Germany and Italy. Each of these countries have embraced alterna-tive Ucits in a significant way, in many cases far more so than they ever did hedge funds.

The question to ask yourself though is how do I capitalise on these flows and steer them into my own fund vehicles. Simply put, you need to know each of the core markets in detail and have a clear plan on how to position your fund to best capture investor flow.

In order to build a successful strategy it is impera-tive that you first understand who within each market is driving the flows. By way of an example, Italy today is dominated by bank led distribution into the wealth man-agement channels; in contrast flows in Germany are be-ing driven via consultants who in turn are representing pension funds and insurance companies. Accessing these channels is extremely difficult for an inexperienced mar-keter, local expertise is definitely required.

Looking further afield, Switzerland is becoming in-creasingly interesting for alternative Ucits funds. With the raft of incoming FINMA regulations, it is becoming progressively more difficult for managers to distribute off-shore funds, locally registered or not. Allocators who we

THE FORECASTED METEORIC GROWTH IN ALTERNATIVE UCITS REPRESENTS AN

EXCELLENT OPPORTUNITY FOR ALTERNATIVE

MANAGERS TO VENTURE INTO THE EUROPEAN REGULATED SPACE

”

CYRIL DELAMARE, CEO AT ML CAPITAL, TALKS TO HFMWEEK ABOUT HOW ALTERNATIVE UCITS FUNDS HAVE GROWN IN POPULARITY AND WHERE THE OPPORTUNITIES FOR THIS FUND TYPE ARE

UCITS GROWTH: 2014 AND BEYOND

Cyril Delamare is the chief executive officer ML Capital, investment manager to the MontLake Ucits platform. Prior to co-founding ML Capital in 2009, Cyril was a partner at Tara Capital, a leading global distributor of hedge funds which helped money management clients attract over $3bn in new assets. .

F I N A N C I A L S E R V I C E S

1 4 H F M W E E K . CO M

U C I T S 2 0 1 4 - 1 5

have known for years are now having to embrace Ucits, something they vowed never to do.

HFM: What opportunities exist for alterna-tive Ucits asset raising outside of Europe?

CD: While most managers to date have primarily focused on Europe for their alternative Ucits as-set raising, clear opportunities exist further afield.

Asia has always been an attractive market and interest from investors in Taiwan and Korea has never been higher. Taiwan is widely seen as the fastest growing Asian market, whilst Korea remains a key jurisdiction, with many large in-stitutional players being extremely active in the alternatives Ucits space. Japan is also gaining in significance and recent rules changes look like they may simplify distribution into this exciting market. South America, largely accessed via the Miami offshore broker community, also offers interesting prospect for managers seeking alter-native sources of investors. An area that we also see growing in significance is that of the offshore IFA, a market which tends to cater to the ex-pat community across the world.

It is clear that there are a number of areas that will provide a

key development angle for managers going forward. Finding the right local partner to support your distri-bution efforts is key.

HFM: What strategies are selling best and where do the opportunities lie in 2015?

CD: Each quarter ML Capital publishes its Alterna-tive Ucits Barometer, a forward-looking research re-port which surveys a number of investors to uncover current appetite for a number of strategies in terms of future allocations. Investor themes and opinions reported in our survey this year have played out into wider market sentiment and allocations. Throughout 2014, investors have shown most interest for fixed-income, discretionary macro and non-directional equity funds and net inflows have backed this up.

Moving into 2015, we are confident that the strategies that have proven most resilient in 2014 will continue to remain at the forefront of investor demand. Somewhat surprisingly, given the extreme volatility in equity markets these past few weeks, we

also expect equity strategies, specifically Asia, EM and global, to attract significant inflows and, lastly, we see demand for CTA strategies finally picking up and we expect to see net inflows into the asset class for the first time in three years.

THROUGHOUT 2014, INVESTORS HAVE SHOWN

MOST INTEREST FOR FIXED-INCOME, DISCRETIONARY

MACRO AND NON-DIRECTIONAL EQUITY FUNDS

AND NET INFLOWS HAVE BACKED THIS UP

”

1 Vide Article 36(1)(a) AIFMD 2 Vide Article 21.7 from the said directive 3 Vide Article 21.8 from the said directive 4 Vide Article 21.9 from the said directive

P R I V A T E & C O R P O R A T E B A N K I N G / W E A L T H M A N A G E M E N T / F U N D C U S T O D Y

The AIFMD sets out a number of regulatory requirements that need to

be met by alternative investment fund managers marketing funds in the

European Economic Area (EEA). Alternative investment fund managers that

market non-EEA alternative investment funds to professional investors in

EEA countries must comply with Depositary Lite regime.

Through its Depositary Lite solutions Sparkasse Bank Malta will be able to

support these alternative investment fund managers falling within scope of

the AIFMD.

Services include: provision of Bank account, cash flow monitoring2, safekeeping of assets3 and oversight duties4.

Contact our dedicated teams of experts for further information. The Depositary Lite service

forms part of our overall AIFM solution but is available as a standalone too.

Sparkasse Bank Malta plc

101 Townsquare,

Ix-Xatt Ta’ Qui-Si-Sana,

Sliema, SLM 3112 – Malta

Depositary Lite1

We’re AIFMD ready – your Depositary partner in Malta.

Sparkasse Bank Malta plc is authorised to conduct Banking business

and to conduct Investment Services business by the Malta Financial Services Authority (MFSA).

Tel: +356 2133 5705 • Fax: +356 2133 5710 • [email protected] • www.sparkasse-bank-malta.com

Part of the Austrian Savings Banks - Banking since 1872

By bringing together people, capital and ideas, Goldman Sachs produces solutions and results for our

clients. Our Fund Solutions team within the securities division helps clients access both unique internal

cross asset content and a select group of external alternative asset managers.

© Copyright 2014 Goldman Sachs. All rights reserved. See www.gs.com/disclaimer/email-salesandtrading.html. This material is a solicitation of derivatives business generally, only for the purposes of, and to the extent it would otherwise be subject to, CFTC Regulations 1.71 and 23.605. Goldman Sachs International (“GSI”) is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) and appears in the FCA register under number 142888. GSI is subject to the FCA and PRA rules and guidance.

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