By Charles Gubert From CooConnect

Among the many findings in the UK Financial Conduct Authority’s (FCA) just published Hedge Fund Survey is the “revelation” that the EU’s Alternative Investment Fund Managers Directive (AIFMD) has not facilitated an exodus of managers moving onshore.

The survey of 49 firms running $345 billion in Assets under Management (AuM) found the lion’s share (67%) of hedge funds continue to be domiciled in the Cayman Islands. The next most popular domiciles were the US (10%) and Ireland (10%), a very distant second place.

The dearth of managers actually on-shoring their funds is perfectly explicable. One consultant highlights very few managers will actively seek to re-domicile their fund (given the laborious workload and costs associated with it) unless a large European institutional investor demands it in exchange for a meaningful ticket allocation. The aversion towards hedge funds endemic at most European institutions means the frequency of managers moving their businesses onshore is fairly far and few between at present.

The lack of clarity over AIFMD is another factor behind this. Most Cayman-domiciled or offshore managers are adopting a “wait and see” mentality before pushing into Europe. Non-EU managers are seething at having to publicly disclose their senior personnel’s remuneration packages and submit to the Annex IV reporting obligations – an exercise that has been compared to supplying Forms PF and CPO-PQR to the US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) respectively.

Other managers are simply frightened by the compliance costs AIFMD entails, estimated by BNY Mellon to be anywhere between $300,000 and $1 million. Nearly all of those firms hoping to circumvent the most onerous provisions of AIFMD are hoping to do so by relying on the yet-to-be-properly defined concept of reverse solicitation. A Deutsche Bank survey of hedge fund chief operating officers found 90% of US managers to be undecided or uninterested about complying with AIFMD even if the marketing passport was extended to them. It is no surprise therefore most firms are electing to maintain the status quo and remain offshore.

That is not to say managers will remain offshore indefinitely. For all of the faults AIFMD has, it does present opportunities. While the distribution benefits are questionable at present, there is a possibility an AIFMD brand akin to UCITS could one day emerge.  Unlike UCITS, AIFMs are subjected to less restrictive liquidity terms enabling them to pursue more exciting strategies, and this could facilitate a move onshore.

Others are not quite so optimistic. As one experienced investor puts it; UCITS took 25 years to attain the status it enjoys today. By his reckoning, AIFMs might struggle to become a brand any-time before 2038. If that is the case, the Cayman Islands is likely to maintain its dominance as domicile of choice for the hedge fund industry for quite a while longer.

For more on this story go to:

http://www.cooconnect.com/news/cayman-still-reigns-supreme