Hedge Funds Workshop

Hedge Funds Workshop

Hong Kong, 11th November 2010 Luxembourg s role as a European Hedge Fund center Moderator: Gilles Dusemon, Arendt & Medernach Patrick Goebel, Allen & Overy Bill Jones, ManagementPlus Javed Rahman, Alter Domus, Hong Kong

Agenda Luxembourg A leading hub for regulated Hedge Funds Large choice of fund structures for implementing Hedge Fund strategies Key Services Providers The Prime Broker Approval process UCITS a strict regulatory environment for alternative investment strategies Where to set up your Hedge Fund? The AIFMD: Impact on Luxembourg based Hedge Funds 3

Luxembourg A leading hub for regulated Hedge Funds Long established financial center of first class reputation, stable social and political environment World-renowned quality brand Increase of 14,23% in overall net assets in the Hedge Fund sector since December 2009: overall net assets of 141 billion Leading Hedge Fund managers operate Luxembourg based vehicles Presence of leading Hedge Fund service providers in Luxembourg: expertise and know-how in fund creation, administration and distribution Strong marketing and distribution history makes Luxembourg a center of choice for alternative UCITS 4

Luxembourg A leading hub for regulated Hedge Funds 632 Funds Net assets Domiciled 36% FoHF Nondomiciled 33% Domiciled 33% FoHF 60% Nondomiciled 27% 69% 141 541 millions Domiciled 16% HF 31% Nondomiciled 15% Domiciled 21% HF 40% Nondomiciled 19% Source: ALFI (June 2010) 5

Luxembourg A leading hub for regulated Hedge Funds Aberdeen Asset Managers Alliance Bernstein BlackRock BlueBay Asset Management Crédit Agricole Crédit Suisse Deutsche Bank Fidelity GLG Goldman Sachs HSBC ING Invesco JP Morgan LCF Rothschild Lyxor Man Investments Morgan Stanley Permal Pioneer Investments Transtrend UBS Brevan Howard Blue Crest 6

Large choice of fund structures for implementing Hedge Fund strategies Regulation public distribution (retail + institutional investors) eligible asset classes only high level of regulation public distribution (retail + institutional investors) no EU passport all asset classes medium level regulation qualifying investors only (institutional, professional, well-informed) all asset classes low / medium level regulation UCITS UCI Part II SIF Structuring - flexibility 7

What are the players and key requirements? Mandatory Luxembourg service providers: Directors Custodian Central Administration Agent Auditor UCITS UCI Part II SIF Optional service providers: Investment Manager Investment Advisor Distributor Prime Broker Promotor requirement (only UCITS and UCIs) Risk Management (only UCITS and UCIs) Substance requirements (only UCITS) 8

Large choice of fund structures for implementing Hedge Fund strategies Substance requirements SIF UCI UCITS Head office of SICAV/SICAF or ManCo of FCP in Luxembourg Head office of SICAV/SICAF or ManCo of FCP in Luxembourg Head office of SICAV/SICAF or ManCo of FCP in Luxembourg N/A N/A One of the two conducting persons of the ManCo of the FCP or of the selfmanaged SICAV must be in Luxembourg 9

Large choice of fund structures for implementing Hedge Fund strategies Substance requirements SIF UCI UCITS ManCo requirement (chapter 14) for FCP ManCo requirement (chapter 14) for FCP ManCo requirement (chapter 13) for FCP N/A N/A SICAV/SICAF may be self-managed or may appoint a ManCo 10

Large choice of fund structures for implementing Hedge Fund strategies Substance requirements SIF UCI UCITS Subscribed share capital and share premium: EUR 1,25 million (to be reached within 12 months) Minimum capital at fund level: EUR 1,25 million (to be reached within 6 months) Minimum capital at fund level: EUR 1,25 million (to be reached within 6 months) Self-managed SICAV/SICAF: EUR 300.000 EUR 1,25 million (to be reached within 6 months) 11

Large choice of fund structures for implementing Hedge Fund strategies Substance requirements SIF UCI UCITS Subscribed share capital and share premium: EUR 1,25 million (to be reached within 12 months) Minimum capital at fund level: EUR 1,25 million (to be reached within 6 months) Minimum capital at fund level: EUR 1,25 million (to be reached within 6 months) Self-managed SICAV/SICAF: EUR 300.000 EUR 1,25 million (to be reached within 6 months) 12

Large choice of fund structures for implementing Hedge Fund strategies Substance requirements SIF UCI UCITS Capital requirement for ManCo: Initial capital: EUR 125.000 Capital requirement for ManCo: Initial capital: EUR 125.000 Capital requirement for ManCo: Initial capital: EUR 125.000 Additional capital: 0,02% of value of portfolios managed by the ManCo in excess of EUR 250 million 13

Key legal documents Prospectus Simplified prospectus (for UCITS) Articles of incorporation, if corporate structure Management regulations, if contractual structure Service agreements 14

Key Services Providers mandatory for SIFs, UCIs and UCITS choice of the custodian is subject to CSSF approval custodian must be a credit institution within the meaning of the 1993 Law custodian must have its registered office in Luxembourg or be established in Luxembourg, if registered office is in another EU Member State (for UCI, registered office may be in a third country) duties: safekeeping function monitoring function: know at all times how the assets are invested and where and how the assets are available ensure that third parties with whom assets are deposited are honourable, competent and have sufficient financial means 15

Key Services Providers central administration must be in Luxembourg choice of central administration is subject to CSSF approval duties: calculation of NAV account keeping making accounts available processing of issue and redemption of shares register keeping establishing prospectus + financial reports dispatching notices + reports 16

The Prime Broker Typically involvement of a Prime Broker in a Hedge Fund Safekeeping of Fund s assets Execution of transactions and netting operations for account of the Fund Margin deposits Debt financing Participation in securities lending transactions, borrowings or repurchase transactions Advantages of using a Prime Broker Better coordination of relevant services Access to a larger number of financial assets (OTC market) otherwise not accessible Economies of scale Access to financing 17

The Prime Broker Intervention of the Prime Broker in duties which are traditionally duties of the Custodian Bank Safekeeping of assets by the Prime Broker or its correspondents Assistance in certain duties (e.g. for transactions involving assets of the Fund, ensuring that consideration remitted within customary time limits; in FCPs, ensuring that instructions of the management company comply with law and management regulations) Risks of using a Prime Broker 18

Approval process Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12 UCI and UCITS - Identifying and deciding on key structural issues - Drafting key legal documents, amending and settling them with all interested parties Submission to CSSF 1. CSSF comments 2. CSSF comments - CSSF approval & launching date - Start of public offer private placement in Luxem-bourg - For UCITS, start of 2 months notifica-tion period Week 12 + 2 months For UCITS, start of public offer in other EU countries SIFs - Identifying and deciding on key structural issues - Drafting key legal documents, amending and settling them with all interested parties Inception of SIF + start of private placement in Luxembourg and other countries Submission of application to CSSF CSSF approval Although a SIF may be launched prior to CSSF approval (provided the application for approval with the CSSF is made within the month following the creation), it is usually recommended to submit the term sheet to the CSSF before launch to determine whether the CSSF has any substantial issues. 19

UCITS A strict regulatory environment for alternative investment strategies Press releases There is a substantial demand, in particular from HNWI, for regulated fund of hedge funds profiles Since the crisis of 2008, the need for more liquidity and tighter regulation certainly brought UCITS firmly into the spotlight. Following the wake of gates, suspensions, losses, regulators and investors started to look towards regulation Most of the largest Fund of Hedge Funds managers intend to enter the UCITS space over the next year Ambition to gather more assets from sources that are not or no longer accessible through offshore funds or managed accounts 20

UCITS A strict regulatory environment for alternative investment strategies Investment strategies and restrictions Art. 41 + following of 2002 Law CESR guidelines Grand Ducal regulation of 8 February 2008 21

UCITS A strict regulatory environment for alternative investment strategies Short positions through derivatives Closed end listed alternative funds Regulated open end alternative funds within trash ratio Derivatives on commodity indices Certificates on uneligible assets if no embedded derivatives CDS on loans with cash settlement 100% leverage through derivatives Liquid portfolio Direct short sales Open end alternative funds Direct investment in commodities Derivatives on commodities Certificate embedding derivatives on uneligible assets CDS resulting in kind settlement Leverage from borrowing Illiquid portfolio 22

UCITS A strict regulatory environment for alternative investment strategies Risk management Art. 42 (1) of 2002 Law CSSF Circular 07/308 organisational requirements limitations on risk valuation 23

UCITS A strict regulatory environment for alternative investment strategies Applicable provisions Art. 42 (1) of the 2002 Law CSSF Circular 07/308 on risk management Organisational requirements Self-assessment: sophisticated / non-sophisticated UCITS Change of risk classification -> information of the CSSF Risk Management: independent unit Reasons for implementing a Risk Management Limitations on risk Measurement + monitoring of market risk Measurement + monitoring of counterparty risk Measurement + monitoring of concentration risk Measurement + control of valuation of OTC derivatives Risk reporting, communication to CSSF Concentration risk Counterparty risk Market risk: non-sophisticated UCITS = commitment approach sophisticated UCITS = relative / absolute VAR (sophisticated approach) Valuation Fair and on an independent basis based on current market value; if not available, valuation according to appropriate + recognized methodology 24

Where to set up your Hedge Fund? Criteria for chosing a specific jurisdiction: Regulatory status Time to market Diversification rules / investment restrictions Requirements pertaining to custodian and central administration Investor information Set-up costs 25

A comparison of domiciles Luxembour 3) Delegation g Dublin Malta Cyprus Cayman Islands Regulatory Status Regulated by CSSF Regulated by IFSRA Regulated by MFSA Regulated by Central Bank Regulated by CIMA, Exemptions Number of Funds & AUM Total AUM: Euro 1,840,993 billion Total AUM: Euro 748,629 billion Total AUM: Euro 7.5 billion 9,350 Registered Funds Administration Requirements Central Administration must be on-shore Central Administration must be on-shore No such requirement No such requirement No such requirements Types of Hedge Funds UCITS, Non-UCITS, SIF, SICAR. Can be set up in corporate or contractual form UCITS, Non-UCITS, Professional/Qualifyin g Investor Funds. Can be set up as corporate entities, partnerships or unit trusts UCITS, Professional Investor Funds three levels (experienced, qualifying, extraordinary) Mutual Funds (exemption from licensing & registration for funds with investors fewer than 15) 26

A comparison of domiciles Luxembour g Dublin Malta Cyprus Cayman Islands Time to Market Overall Cost to launch 2-4 months 2-4 months 1-3 months 1-2 months 1-2 months Euro 30-100K Euro 30-100K Euro 25-80K Euro 25-60K US$35-75K 27

Where to set up your Hedge Fund? Set-up costs Notary fees for incorporation of fund or management company: EUR 2000 5000 Publication fees in Mémorial: EUR ± 1200 Registration duty (for funds in corporate form): EUR 75 Registration costs in the Companies Registrar (for funds in corporate form): EUR ± 150 Registration costs with CSSF (flat fee + on an annual basis) single fund: EUR 2650 umbrella fund: EUR 5000 Additional costs if set-up of a management company Service provider fees Legal fees 28

The AIFMD: Timeline 30 April 2009: Draft of the EU Commission May 2009 October 2010: Compromise several proposals of the EU Council under the Swedish, Spanish and Belgian Presidency 19 October 2010: Unanimous agreement in ECOFIN agreement of Parliament is outstanding 11 November 2010: Vote in plenary session of European Parliament? 2011: Entering into force 2013: Transposition by Member States 2014: Application for authorisation by EU AIFM 29

The AIFMD: Key considerations Direct regulation of alternative investment fund managers (AIFM) and indirect regulation of alternative investment funds (AIF) All types of AIF are in scope: one size fits all approach (Hedge Funds, Real Estate Funds, Private Equity Funds ) Creation of an EU passport (2013): for cross-border management of EU AIF for cross-border distribution of EU AIF to professional investors EU passport may also apply to non-eu AIFM and non-eu AIF (2015) National private placement rules are maintained during transitional period of 5 years (2013-2018) 30

Practical structuring examples of Luxembourg Hedge Funds Today: 1) Lux SICAV (SIF, UCITS, UCI) Hong Kong based manager 2) Lux ManCo Lux FCP (SIF, UCI, UCITS) Hong Kong based manager 31

Practical structuring examples of Luxembourg Hedge Funds AIFMD: 1) Passport Hong Kong based AIFM (authorised as per art. 37) Lux AIF (EU AIF) or non-eu AIF Access to EU passport for marketing of EU AIF as from 2015 (art. 38) Access to EU passport for marketing of non-eu AIF as from 2015 (art. 39) 2) Private placement Hong Kong based AIFM Lux AIF (EU AIF) or non-eu AIF Conditions with respect to AIF (art. 40): annual report disclosure to investors reporting to competent authorities Marketing in EU via private placement from 2013-2018 32

Practical structuring examples of Luxembourg Hedge Funds AIFMD: 3) Delegation Lux based AIFM or Lux based self-managed AIF Hong Kong based manager Delegation by EU based AIFM or self-managed AIF to Hong Kong asset manager (art.20) 33

Hong Kong, 11th November 2010 Questions? Thank you for attending