Hedge funds unlikely to revoke offshore status

A predicted wholesale shift by offshore hedge funds to re-domicile under EU UCITS legislation is unlikely, according to a survey by RBC Dexia and KPMG released today.

The survey highlights that 24% of respondents who said they had already set up onshore funds preferred co-domiciliation to redomiciliation, i.e. creating  funds complementing existing offshore strategies rather than a simple transfer of their domicile to the EU. Of the 27% who are considering creating EU regulated funds in the future, only a minority said they might do so under the UCITS framework. Respondents preferred dedicated alternative structures such as Irish Qualified Investment Funds (QIFs) or Luxembourg Specialised Investment Funds (SIFs).

While the trend for hedge funds to create more EU regulated funds seems set to continue however, with 27% of respondents stating that they are considering doing so, less than 5% of those with onshore funds said they had decided to transfer the domicile of their funds to the EU outright.

The research also shows that the UCITS framework, which some respondents said was an effective marketing tool to stem outflows during the financial crisis, has lost some of its appeal amongst hedge fund managers. Indeed, whereas those polled were just as likely to set up UCITS funds as other regulated structures, such as Irish QIFs and Luxembourg SIFs, in the past, 77% of those considering creating an onshore structure in the future now say they would prefer QIFs and SIFs instead.

Tom Brown, KPMG Head of Investment Management for the EMEA Region, said: “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.”