The Hedge Fund Journal has gathered views from multiple sources (lawyers, other service providers, briefings and conference panels) to outline, at a high level, at least seven avenues fund managers inside and outside Europe can research when fundraising in Europe: managed accounts; exchange traded instruments; AIFMD and UCITS passports; National Private Placement Regimes; Platforms and Reverse Solicitation. The number of routes to market is greater than is perceived by some managers, particularly US managers who sometimes think AIFMD is unavoidable.
Dedicated managed accounts, i.e. for a specific investor, or ‘funds of one’, are often mentioned as an afterthought but could be the first port of call for some strategies. They can sit outside the scope of AIFMD and are particularly popular for discretionary macro, systematic macro, quantitative, CTA and managed futures type strategies, including GTAA and currency overlays. Some large investors allocate exclusively via managed accounts and others prize the transparency and control that they afford. Managed Account Platforms (MAPs) are a different type of structure however, which will usually have regulatory authorisations under AIFMD or UCITS or both, as the MAP typically houses funds for multiple investors.
Exchange traded instruments
Instruments listed on an EU-regulated exchange can also be outside AIFMD, and can become investible by UCITS funds. Where assets ordinarily ineligible for UCITS are wrapped in ETIs, investors may ask whether any maturity transformation is taking place and, if so, who is underwriting any liquidity mismatch.
Marketing a fund in Europe will tend to run into one or more regulatory frameworks. AIFMD and UCITS theoretically overarch at pan European level but can vary by country, as do National Private Placement Regimes (NPPRs) and Reverse Solicitation rules set at national level. Special conditions may apply in Switzerland. All of these can entail various fees and costs.
An ongoing debate exists around whether the European Union’s 28 national financial regulators, should charge fees for various forms of local market access. Article 42 of AIFMD permits host regulators to impose ‘additional requirements’ on third countries (i.e. those outside the EEA), and this can be interpreted to include fees. But what is less clear is whether fees should apply for AIFMD or UCITS marketing passport notifications, hence many observers fret that fees create barriers to cross-border sales and so conflict with the spirit of an internal market.
Indeed, this distinction may resonate with a number of regulators, including those in Ireland, the Netherlands and Sweden, which have confirmed that they do not charge for AIFMD or UCITS marketing passport notifications. But Sweden can, for instance, charge non-EEA-based AIF managers SEK 15,000 (about US$1,800) for access to its NPPR. And practice varies. In wealthy Luxembourg, an extensive schedule of fees can range between €2,650 and €10,000, with the higher fees apparently applying to ‘umbrella’ structures or platforms. This means the cost per fund cell could work out lower.
Elsewhere regulators may not charge for marketing passport notifications per se, but could impose other charges for marketing, which could be €4,000 in Italy for instance, or as much as €5,000 for prospectus approval in Slovenia. Some regulators charge the same fee for AIFMD or UCITS passports or NPPRs; they do not distinguish between EEA and non-EEA funds or managers, and do not offer discounts for multiple funds on a platform or umbrella. Lawyers will often make these applications for their clients, though we do know of some smaller funds that have been through the process themselves.
Non-fee costs should also be considered in some instances. The UCITS Directive requires country supplements and a Local Information Agent (LIA). Here, the French requirement for a Paying Agent may not actually require a second local service provider, as the Paying Agent role is subsumed into the LIA role. Germany and Austria may need a local tax agent, while a local distributor might also be needed in Spain for tax reasons.
A local distributor may also be required in Switzerland, but it depends on the type of investor. For ‘regulated qualified investors’ (defined to include FINMA-regulated banks, broker dealers, asset managers and insurance companies) local registration or representation might not be needed, but it is for ‘unregulated qualified investors’ including pension funds and high net worth individuals.
Moving onto NPPRs, for the time being some countries can ‘gold plate’ regimes with Germany and Denmark requiring a depo-lite. Though Sweden has for many years given local retail investors access to hedge funds, it has extra requirements for NPPRs – a local agent and pre-vetting by the regulator – that may take two months or so and usually requires legal advice. France is thought to have erected the highest barriers for non-EU managers by essentially stipulating equivalence with local AIFMD rules.
Who bears costs?
Regulatory fees (or non-fee costs such as service provider fees) can be borne by either funds or by managers, according to offering documents and discretionary choices. For smaller entities the costs are material. Fees of say €50,000, from 10 or more regulators, could add 0.50% to the expense ratio of a €10 million fund – or eat up 50% of the management fee income from a 1% fee.
Third country AIFMD passport
Which begs the question – would it be simpler for some managers to avail of the third country AIFMD passport, which ESMA has provisionally granted to Jersey, Guernsey and Switzerland (with decisions due on USA, Hong Kong Singapore, Japan, Canada, Isle of Man, the Cayman Islands, Bermuda and Australia by June 2016).
It is thought that third country AIFMD passports would need to be extended to domiciles of both the fund, and the manager. Then the most common combination of domiciles (US manager, Cayman fund) would not be able to avail of the passport, if Cayman gets the passport and the USA does not.
In any case, the AIFMD passport may not entice many managers if the passport regime imposes 95% of AIFMD requirements on the manager, with the only real variation being more flexibility over the location of the depositary. If essentially the entire AIFMD applies to the manager and the fund, including the remuneration rules and the full depositary requirements, this could be onerous. The third country passport might end up appealing mainly to EU AIFMs with funds in any eventually approved domicile (such as Cayman), as they will already be subject to the vast majority of AIFMD.
Platforms, including AIFMD or UCITS MAPs or non-MAP platforms, including AIFMD mancos, may handle much of the paperwork and bypass what may be multi-month timelines for set-ups and approvals. Managers can buy somebody else’s AIFMD compliant infrastructure and set up a sub-fund of an EU domiciled umbrella AIF with EU authorised AIFM. But platforms should not necessarily be seen, or marketed, as a stress-free ‘turnkey solution’. Each sub-fund still needs to procure a marketing passport notification, and there may be other complications. There could be governance structures to get comfortable with in terms of which entity controls the management company board.
Reverse solicitation does not involve up front regulatory fees or costs, but can involve much larger contingent costs if it is not done properly. An auditable chain of correspondence showing that the investor made the first contact is one requirement, with emails or letters preferable to phone calls. The downside to getting it wrong could involve being accused of mis-selling or mis-representation. In turn, the consequences could include investors having a free option to redeem or seek compensation, regulatory sanctions, penalties or fines. Each country in the EU – and Switzerland outside the EU – sets its own rules. Nonetheless, reverse solicitation is widely used and media coverage in Europe is perceived as one way to encourage more reverse enquiries.
Though the above has been corroborated from multiple sources the standard caveat, that professional advice should be sought, applies.