Editor’s Letter – Issue 117

October 2016

Originally published in the October 2016 issue

If fewer hedge funds are launching than in prior years, this is partly due to the time taken to start funds, set up management structures, or get onto third party platforms. But various options are marketed as offering a faster time to market.

Offshore international financial centres, including Jersey and Guernsey, say their regulators are swifter in signing off new management companies and funds. Some onshore centres also offer fund structures with potential for ‘fast track’ approval.

For those that already have an AIFMD-compliant management company, unregulated funds can be approved in days or weeks. Luxembourg’s RAIF (Reserve Alternative Investment Fund) and Malta’s NAIF (Notified Alternative Investment Fund) are not authorised, supervised nor regulated by their respective regulators (the CSSF and MFSA), and can avail of AIFMD passporting rights. Ireland has not coined a new fund name nor acronym, but its unregulated limited partnerships, run by AIMFD-compliant mancos, offer the same two key features: as AIFs they can be passported, but are not regulated by the Central Bank of Ireland.

Managers that do not yet have a management company structure, can choose between a self-managed company and a third party one (and certain Brexit scenarios could increase demand for such mancos in EU domiciles). A number of third party providers claim that time to market could be as short as one or two months, but anecdotally we hear that six to nine months is more typical, and over one year is not unusual. Phrases such as ‘plug and play’ or ‘turnkey solution’ do not guarantee any maximum timeframe for launches. This is partly because, although ‘one stop shop’ is another widely used slogan, structures will in practice vary in how comprehensive their offering is, which in turn determines how duties are divided amongst third party manco(s), managers, and potentially many other service providers. Some platforms only offer one or two of UCITS, AIFs and a MiFID license for separately managed accounts, while others can do all three. Enumerating administration, custody, depositary activities, audit, legal, compliance, corporate secretarial, trade execution, currency hedging, independent risk management, and board services, is not exhaustive, but many platforms do not offer all of these and some would not want to. Segregation between certain functions, to avoid the perception of potential conflicts of interest, is sought after by some investors and managers, who, for instance, like to see funds, and third party management companies, having different directors.

Therefore, many months of service level agreement negotiation may need to be factored into the equation. Entrepreneurs are pathological optimists and the most ambitious managers seeking to attract institutional investors will probably want a fully regulated structure from the outset. However, others, including those who contemplate running smaller amounts of money, could find that a de minimis, sub-AIFMD threshold structure and/or managed account is quicker to launch, and cheaper to run, whilst they are developing a track record.