In the immediate aftermath of the financial crisis there was talk of a rush of funds looking to re-domicile from offshore jurisdictions such as the Cayman Islands and Bermuda, but movement has been very slow.

In September 2015, UBS Hedge Fund Solutions re-domiciled a Cayman fund under the Irish Collective Asset management Vehicle Act of 2015 – the first time the structure had been used to bring an existing fund onshore. At the time, UBS said the move came in response to rising investor demand for more regulated vehicles.

However, few others have followed suit. What there has been is increased interest in setting up new funds in the EU due to the introduction of the AIFMD. In the past, these funds may have been established in offshore jurisdictions – now they are being established mainly in Ireland and Luxembourg.

Data from EFAMA for the fourth quarter of 2015 indicates that Luxembourg has a 27.9% share of net assets of the European investment fund industry and that its assets rose by 13.3% last year. Ireland (with 15.1%) had the next largest share and recorded growth of 14.1% in 2015. Net assets in the UK – which accounts for 11.8% of all European fund AuM – lag those of Germany (13.7%) and France (13.4%), which are dominated by local funds.

Parallel parking

Analysis of cross-border assets under management (AuM) in Europe undertaken by Cerulli points to strong growth over the last two years, with AuM of €2,689bn in 2013 rising to €3,201bn in 2014 then €3,358bn for the first nine months of 2015.

“It is important to note that many of these new funds are not strictly replacements for offshore funds,” explains Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman. “Many managers are wary of having the AIFMD rules apply to their global investor base so they are establishing Europe-domiciled funds for distribution to European investors, while using offshore jurisdictions for their global client base.” In essence, they are setting up parallel vehicles.

A spokesperson for the Associated Luxembourg Funds Industry (ALFI) points out that Luxembourg structures can be combined with other onshore or offshore vehicles. “For limited partnership structures, it is often the case that managers (general partners) are domiciled in offshore centres whereas the investors (limited partners) and advisors are domiciled onshore. Another option is to set up a master-feeder structure, where either the master or the feeder is domiciled in an offshore centre.”

The Irish Collective Asset management Vehicle (ICAV) can be used within a master-feeder structure, observes Tara Doyle, head of the asset management and investment funds group at Matheson. “For example, it is possible to establish an Irish feeder ICAV fund and a parallel Cayman feeder fund or Delaware LP feeder fund, with an ICAV master fund. This structure is attractive as it would allow for access to a European passport under either the UCITS Directive or AIFMD.”

Home comforts

Doyle says the ICAV demonstrates Ireland’s proactive approach to meeting the needs of fund promoters and that it enhancements mean that promoters have more flexibility around the organisation of AGMs and the preparation of accounts for umbrella funds, which should assist them in reducing operating costs. 

“The ICAV is also the first Irish corporate vehicle that is not obliged by legislation to diversify its portfolio, making it suitable to house more strategies than the traditional PLC,” says Doyle. “We expect the majority of new fund launches to opt for the ICAV over the PLC vehicle and see it becoming the vehicle of choice for both UCITS and AIFs.”

Luxembourg’s product offering will soon be augmented by a new alternative vehicle for which the draft law has been deposited with parliament and is expected to be adopted in Q2 2016.

The Reserved Alternative Investment Fund or RAIF is the latest step in Luxembourg’s drive to become a hub for alternative investment funds and their managers. It has very similar features to Specialised Investment Funds and SICARs, but does not need to be approved and is not supervised by the Commission de Surveillance du Secteur Financier (CSSF).

Island attraction

There has always been a section of European investors that believed they should invest in onshore funds; the arrival of AIFMD meant that group of investors became larger. Institutional investors from continental Europe or Scandinavia will almost certainly opt for this approach.

This does not spell the end of Cayman, suggests Peter Astleford, a partner at Dechert, but rather indicates that the number of funds set up in Europe (in Malta as well as Ireland, Luxembourg and the UK) will increase significantly.

“You have to look at it from a global perspective,” he observes. “Europe is maybe 20% of the market and Asia and the US will continue to use Cayman. Each European centre says it is the best but it is broadly the same proposition and the same idea. Where the UK is different is that it is a very attractive proposition from a tax angle, but it looks complicated and there has not been a joined-up approach of all the relevant parties to try and push the UK as a jurisdiction as there has been in Ireland, Luxembourg and Malta.”

It is tempting to discount Malta based on its scale, but Astleford notes that Ireland was relatively small not that long ago and that Malta is the only location in Europe that ticks the boxes of a net 5% corporation tax rate and a special 15% top rate of income tax.

“In the same way that Europe is not going to end Cayman as a fund domicile – even after the Panama papers – so Malta is not going to threaten Luxembourg or Dublin, but it will be an interesting addition. Malta has an attractive range of double tax treaties, the funds themselves are tax free and the workforce is considerably less expensive than London, Dublin or Luxembourg City.”

In March, the Malta Financial Services Authority launched its Notified Alternative Investment Funds framework, which like Luxembourg’s RAIF will enable funds to be brought to market without intense regulatory scrutiny.

Broadly, the Dublin administrators have always been very happy to accommodate onshore and offshore structures and Luxembourg has been less keen to do so, concludes Astleford. “That is not a case of what the official mood of the country is, but rather that of individual administrators.”

Business centres

Jorge Morley-Smith, head of tax at The Investment Association notes that there is a distinction between the business environment for asset managers and the position of the UK as a fund domicile.

“GF International and Generali are examples of asset managers establishing a presence in the UK and in this respect, London is competing with locations such as New York, Hong Kong and in Europe, Frankfurt and Paris,” he says. “But on the fund domicile side, the UK often loses out to Luxembourg and Ireland.”

He acknowledges that the UK is behind France and Germany as well as Ireland and Luxembourg as a European funds domicile, but adds that the government has introduced a series of measures to promote the sector.

“What it is has looked at specifically is improving the tax environment by removing taxes on funds such as the special Stamp Duty Reserve Tax charge on UK unit trusts and open-ended investment companies as well as introducing new fund vehicles – most notably Tax Transparent Funds,” says Morley-Smith.

The problem for the UK, concludes Tuffy, is that most in the industry still view the UK as a domestic fund domicile. “If managers are looking to broadly distribute an onshore fund across Europe and beyond, the majority have used either Ireland or Luxembourg.”