Ireland faces a battle to win dominance for Ucits hedge funds. The industry believes its expertise with complex hedge fund strategies should make it a natural choice for hedge fund Ucits products.

Ireland’s path to Ucits hedge funds was not straightforward. The Irish fund industry was more focused on business from the Cayman Islands and felt Ucits retail funds were not something it particularly wanted or needed to concern itself with.

Then under Ucits III hedge funds began to look at how a regulated wrapper could transform an offshore fund, usually domiciled in the Cayman, into a vehicle capable of being invested into by institutions in Europe who were restricted to regulated funds.

As the Irish regulator and the legal community became more adept at structuring these vehicles, some in the rest of the EU worried that Ireland was bending the rules too much to accommodate hedge funds.

Now Ireland’s fund industry is keen to become the domicile of choice for Ucits hedge funds, arguing that its expertise in the more complicated and complex hedge fund strategies gives it an edge Luxembourg and other EU jurisdictions lack.

Ireland’s push to promote its own domestic regulated fund structure, the qualifying investor fund (QIF), has also impacted the total assets held in Ucits vehicles in the jurisdiction. Around 80% of Irish-domiciled assets are now in Ucits funds, totalling approximately Ä652 billion ($797 billion), placing Ireland behind Luxembourg and France in terms of the size of its Ucits industry.

Ireland needs to work hard to catch up the Ucits leaders and is trying to make sure its name is as well known in regions such as the Middle East and Asia where the Ucits brand is recognised by investors who habitually choose Luxembourg-domiciled funds.

The Irish fund industry is undertaking road shows in both regions to kick-start this effort. But with Luxembourg holding first mover advantage, it will be a long haul to convince managers and investors to opt for Ireland over Luxembourg.

Meanwhile, Ireland is continuing to try and capitalise on its existing relationships with hedge fund managers based in the UK and US who have traditionally looked to Ireland for service provision.

The Irish fund industry believes it has a significant advantage when it comes to Ucits-compliant hedge funds. As well as being a popular domicile for a variety of fund types, it is also a major jurisdiction for the administration of alternative funds.

The Irish Funds Industry Association estimates that 41% of the world’s alternative assets, around $690 billion, are administered from the country. Industry providers believe that makes Ireland a logical choice for a hedge fund manager wanting to replicate an offshore product in a Ucits wrapper.

“You have a lot of offshore funds already being administered in Ireland or listed in Ireland. I think that has to be a huge advantage because they know the service providers here have the services and expertise,” says Dillon Eustace partner Brian Kelliher.

Northern Trust’s senior vice-president for product management Ian Headon adds: “It’s not that the Irish Ucits product is better or worse. It’s more a question that there’s a very well-trodden path of the London manager launching a Cayman hedge fund with Irish service providers.”

Ireland has managed to attract a number of single managers launching hedge fund Ucits as well as one of the big bank platforms. Although the recently formed joint venture between Crédit Agricole and Société Générale, Amundi, might have been expected to follow its francophone roots and head for Luxembourg, it instead chose Ireland when it launched its Ucits platform.

The Irish Financial Regulator is praised by the industry for its speed at approving Ucits funds and has a team of experienced staff able to advise on the types of derivatives that can be fitted into a Ucits product. Irish service providers think this is an advantage for hedge fund managers that other jurisdictions cannot boast.

The regulator is currently working with the fund industry to prepare Ireland for Ucits IV. The industry is confident Ireland will be ready for the directive’s implementation in July 2011.

Hedge fund managers looking at Ireland as a possible jurisdiction for a regulated fund can choose between Ucits and the QIF.

QIFs have a minimum investment of Ä250,000 but unlike a Ucits fund there are no restrictions as to the type of strategy that can be run or the amount of leverage used.

While QIFs are well established and generally recognised as a suitable vehicle for a hedge fund in Ireland, they lack global branding. That makes them harder to market to institutional investors looking for the comfort of regulated products.

Both Ucits and QIFs are straightforward to set up in Ireland and benefit from the jurisdiction’s recent redomiciliation legislation. This allows a fund manager to redomicile an offshore hedge fund to Ireland without losing any performance history. The procedure could prove to be a useful draw for managers wanting to replace offshore funds with a Ucits fund, rather than merely replicating the existing product.

Lawyers and fund administrators in Ireland say the last six months have seen a significant pick- up in enquiries from fund managers wanting to set up a Ucits fund in the country.

Many in Ireland attribute the move towards Ucits funds as a way for hedge fund managers to protect themselves against the potential impact of the EU’s alternative investment fund managers (AIFM) directive while minimising the need to appoint new service providers in a different jurisdiction.

The directive looks likely to establish much tougher regulation for vehicles such as QIFs than the Ucits directive. It may be that managers looking at Ireland will prefer to avoid the uncertainty of the AIFM rules and opt for Ucits instead.

Irish service providers are also keenly anticipating Ucits IV. They believe the ability to passport a management company across Europe will be a key innovation in this iteration of Ucits.

Ireland has a small hedge fund management community. It relies predominantly on business from the US and UK. Ucits IV will make it simpler for a fund manager based in London to set up an Irish Ucits as they will not need to establish an Irish management company at the same time.

Looking further into the future, the Irish industry is confident Ucits V will closely follow Ucits IV. That could address some of the concerns raised about the way hedge fund managers are currently fitting strategies into the Ucits wrapper as well as acknowledging that the vehicle has come a long way since it was first devised a quarter of a century ago.