Hedge fund managers look to co-domiciliation of offshore and onshore funds

A study on hedge fund re-domiciliation trends shows that just a small number of hedge fund managers have moved their offshore funds to an EU domicile

Hedge funds managers are looking to create EU-domiciled hedge funds to complement their offshore funds, according to new research.

Only a quarter (24%) of hedge fund managers have already re-domiciled offshore hedge funds to an EU domicile while 27% are considering to do so in the future, according to a report by RBC Dexia Investor Services and KPMG.

Meanwhile, almost half of the 49 hedge managers surveyed had not re-domiciled any funds and had no plans to do so.

The purpose of the study, entitled Alternative options: hedge fund re-domiciliation trends in evolving markets, was to adopt a better understanding of the factors contributing to the re-domiciliation of hedge funds into the EU.

The study predicts that co-domiciliation - where hedge funds would offer both offshore and onshore options – is the best solution for hedge fund managers.

More than half (55%) of managers who had already moved their offshore funds to an onshore jurisdiction said they preferred co-domiciliation instead of replacing their offshore funds with onshore offerings. Meanwhile, less than 5% of managers had relocated their funds to an EU onshore domicile.

However, the report claims that the preference of co-domiciliation over re-domiciliation could be short lived due to the continued uncertainty over the AIFM Directive. The majority of hedge fund managers who said they are considering moving their funds to the EU said they would do so before the Directive comes into place in 2013, while 69% said they would consider doing so by re-domiciling their offshore funds to the EU.

The research also showed that alternative structures such as Irish qualified investor funds (QIFs) and Luxembourg specialised investment funds (SIFs) are becoming more popular than the UCITS structure, where 77% of managers considering to set up an onshore structure in the future say they would prefer QIFs and SIFs instead of UCITS funds.

“The market is starting to realise that even though 90% of alternative strategies can be replicated under UCITS, specialised structures such as SIFs and QIFs offer more flexible liquidity and transparency rules for hedge funds. UCITS still offers very robust protection for investors, but clearly the wholesale shift into alternative UCITS some had been predicting has not taken place,” Tom Brown, EMEA head of investment management for KPMG.