Malta's ambition to be a leading domicile and service provider to the hedge fund industry is being realised as strong growth in the fund registrations and service providers increases in 2010.

Perception is everything and the perception in Malta is that the country is nearing critical mass in the development of its funds sector. Talk with anyone involved in the hedge funds industry and things are booming. The talk is of an influx of alternative fund managers, management companies and redomiciliations as well as the setting-up of new funds.

The statistics show a vibrant sector, with overall alternative investment fund licensing picking up dramatically. However looking purely at the hedge fund sector, the numbers are slightly less exciting.

Up to the end of November 2010 only five hedge funds, all formerly based in the Cayman Islands, redomiciled to Malta. This does not, however, include funds that preferred to move onshore by establishing news funds while winding down their offshore funds. While a small number it is a significant one, given that there were no redomiciles in 2008 and 2009 and only one recorded in 2007.

The figures from the Malta Financial Services Authority (MFSA) refer only to hedge funds opting to use the jurisdiction professional investor fund (PIF) format, the most popular with hedge funds.

New PIF registrations for hedge funds to the end of November 2010 totalled 94 compared with 102 for the full year 2009 and 111 in 2008. By the end of the month there were a total of 291 PIFs domiciled in Malta as well as 50 Ucits schemes (almost exclusively retail) and 31 non-Ucits schemes. Foreign-based collective investment schemes (CIS) numbered 25, giving a total of 397 investment funds based in Malta.

The number of all PIF registrations in the first half of the year continued to increase from 285 licenses in December 2009 to 329 licenses in June 2010, a net increase of 44 licenses or 15%, over December 2009. In the first six months of the year, the MFSA licensed a total of 49 CISs, all for PIFs of which 48 targeted qualifying investors and one experienced investors.

According to the MFSA 48 fund managers were licensed at the end of November 2010. The trends in applications for new fund and fund management licences remained steady over 2010. The MFSA expects the number of new licences approved for both to be substantially more than registrations in 2009.

Looking at a broader base, the jurisdiction is seeing strong growth. In the first two quarters of 2010, the number of funds domiciled in Malta continued to grow at a steady pace. At end June 2010 the total number of licensed CIS including sub-funds totalled 436, a net increase of 41 licences or 11% over December 2009. The second half of the year was expected to show even stronger growth.

So looking at the whole alternatives sector, Malta is booming. Most expect 2010 to be the best year yet for the sector overall. Optimism is running high. The unexpected decision by a few fund managers and even more fund management companies to move to Malta has raised confidence in the jurisdiction’s ability to build on past success.

Although the numbers are still small compared with its main rivals in Europe, Luxembourg and Ireland, Malta has now reached the stage where it is taken seriously as a credible alternative funds jurisdiction.

A lot of the credit for the solid reputation the country has built within the alternatives arena must go to the Malta Financial Services Authority (MFSA). Led by the ebullient and approachable Joseph Bannister, the MFSA has quickly built a reputation among fund managers and promoters as an approachable, flexible yet strict authority. Bannister himself is readily available for meetings, although that could start to change as the jurisdiction grows.

At present, however, the fact that meetings with the regulator are relatively easy to arrange and Bannister’s open-door policy has been a hit with hedge fund managers eager to find out if their strategy can fit into Malta’s regulated environment.

“There is no doubt that financial services is growing in all directions,” says Bannister. “We are seeing growth in the number of funds and in company redomiciliation.” He says the jurisdiction has close and friendly contacts with the Cayman Islands Monetary Authority (Cima). “We’re in touch when Cayman redoms come up. A number of investment companies have redomiciled from the Caribbean to Malta. We have a good exchange of information,” notes Bannister.

According to Bannister the largest redomiciliations have been investment managers moving to Malta. “This is due to pressure from investors. That is obvious,” he says. He also believes uncertainty over the final outcome of the European Union’s alternative investment fund managers (AIFM) directive for most of 2010 also prompted managers and management companies to consider an EU jurisdiction. “The issue of third countries is not resolved. This is one of the reasons we have seen significantly more business in EU jurisdictions,” he states.

Bannister is pleased with the inflow but stresses Malta is not interested in ‘brass plate’ operations. “We insist on substance. We will be flexible, particularly with the smaller start-ups but they need to show us how they are going to introduce substance into the operation,” he explains. “As long as we see a good plan [for development], there is no problem.”

Bannister like many in Malta is confident about the future. “As I go around, I see success. Malta is becoming more vibrant. Where the fund domiciles or redomiciles matters.”

Aside from the influx of managers, companies and funds, Malta is also seeing a rise in fund administrators, although the country is still waiting for some of the largest names to choose Malta.

The only real dark spot on Bannister’s horizon, however, is the lack of international big-name banks and custodians. This is something that is holding back development of Ucits funds which require a custodian in the same domicile as the fund and could impact the country once the AIFM directive is implemented.

The biggest open secret in Malta is the intention of Deutsche Bank to open in Malta with a custody operation. This plan has been on the table for several months. Most expect the bank to move into the jurisdiction in the first half of 2011. That would send a very positive signal to other custodians. There are also rumours that BNY Mellon, which already has links through joint ventures in Malta, could be considering setting up a stand-alone business in Malta. Bannister hints that at least one other German bank and a couple of the major US banks are also eyeing prospects in Malta. State Street, too, has been said to be eyeing prospects in Malta with sightings of senior executives from the bank having high-level meetings in Malta.

In some ways the problem of custodian is a classic chicken and egg one. The country cannot develop as a solid Ucits jurisdiction without the custodians and the custodians need the business to attract them.

“The issue is this: some of the custody banks are looking at different aspects, some want to see volume of business. Others are considering a first mover advantage,” admits Bannister. What could encourage the banks is Malta’s willingness to allow custodians to set up a minimalist office first with a few staff and increase as the business comes to it. “As staff numbers increase, we would expect to see other players in the game. We will see what that will trigger,” says ­Bannister.

Another issue facing Bannister is the growth of his own organisation. With the substantial and somewhat unexpected increase in licensing and redomiciliations in 2010, the MFSA was caught unawares. One of the first things Bannister did to stop bottlenecks was put together an authorisation unit. This group has won industry approval for its ability to move applications along and its willingness to discuss applications and issues in an effort to smooth over the licensing process.

On a more long-term basis, Bannister is looking at how to boost numbers at the MFSA and ensure the regulator has enough people in place with the needed skills and experience for the future. “We have been a little slow on the human resources issue,” admits Bannister. “But there is no real shortage. However, we are consulting with educational institutes and financial services colleges about further education and training. We have created a training centre for the MFSA.”

The MFSA, keen to ensure its response time remains high, has recruited 165 people in 2010. Bannister is not worried about the ability of the MFSA to attract people in future. He says Maltese people are used to retraining and further education. He also is making sure there is adequate in-house staff training and is working with other regulators to create a continuous training programme that can teach younger recruits and ensure they have the skill and expertise for higher-level jobs in future.

Bannister has also taken on board recommendations from consultants from the International Monetary Fund. As a result Bannister has initiated an internal audit and review to make sure the regulator is able to attract and retain the right calibre of staff.

Looking ahead Bannister wants to expand the organisation “to meet the demand” and “move towards better integration”. He stresses the MFSA will not rush into anything. “We need to expand the organisation to meet demand but we also need to make this sustainable and ensure there is proper integration.”

On the hedge fund side Bannister says the question about Malta’s ability to be a viable jurisdiction was once a question of service providers. He is now confident that there is enough choice and diversity, although he would like to see a couple of big-name fund administrators establish a presence in the country.

He is encouraged by the influx of fund managers and management companies and expects that to continue into 2011 and possibly beyond. As more institutional investors, particularly the smaller pension funds and insurance companies in Europe, start to look at the alternative sector for higher returns, he believes start-up funds will continue to see Malta as the best option compared with Ireland, Luxembourg and even London. Certainly the costs of operating in Malta remain substantially below that of its rivals, but more importantly Bannister believes the good reputation of the MFSA and its willingness to talk with the industry and find workable compromises will ensure a flow of new applicants in future.

He says the MFSA will continue to sign double taxation treaties that should benefit the alternatives sector. He is also looking at the introduction of new vehicles like the incorporated cell company (ICC) which does not yet exist in Malta. Bannister wants to make sure Malta gets the structure right before introduction the ICC, a structure he believes will give more legal certainty to investors than sub-funds.

The MFSA is also dealing with more complex and esoteric fund strategies than in the past. One of the latest to exercise the regulator is the application for a licence for a fund to operate an asset-backed lending strategy. Strictly speaking ABL strategy operates as a bank, giving loans. “The issue is it is acting as a bank but within a collective investment scheme. As a bank it would take deposits and use this money to give loans,” explains Bannister. How the regulator responds to such strategies and whether it will be able to maintain its hands-on approach remains to be seen.

Overall, the mood remains positive in Malta. With 2010 set to be a record-breaking year for growth in the alternatives sector, many expect the jurisdiction to reach critical mass in 2012 or perhaps even earlier. Although the ambitious plan of the government to grow the financial services sector to account for 25% of gross domestic product by 2015 remains elusive, most believe Malta is well on the road to becoming an equal to Luxembourg and Ireland as a hedge fund jurisdiction.

Malta performs well in rankings list

Malta has moved into 11th position in financial market development according to the World Economic Forum’s Competitiveness Index 2010-11. Key performance indicators for the financial services sector confirmed its standing as a leading innovator in the Maltese economy. The new ranking is two up from the previous year.

The soundness of Maltese banks has been ranked in 10th position (up from 13th). This also means Malta has effectively retained its joint fifth position in this area, putting Malta firmly in the top 10 of countries with a solid banking sector.

Malta also moved up from one place to 12th position in the assessment carried out on the regulation of securities exchanges and from 12th to eighth position on the strength of auditing and reporting standards.

This WEF Index is based on an assessment of 139 countries. According to the report, the Maltese economy has also moved into 50th position worldwide, up two from the last publication.

Malta also featured strongly on the positive impact of rules on foreign direct investment (seventh), the quality of the educational system (20th) and country credit rating (28th).

The figures for financial services underscore recent performance figures published by the Maltese National Statistics Office showing that the financial sector’s gross value added in the first six months of 2010 increased by 75% over the same period in 2009.

Vision for the future

Not enough people around the world know about Malta, despite the fact that Malta’s financial services industry experienced significant growth and expansion over 2009 and 2010, according to Prime Minister Lawrence Gonzi, speaking at the FinanceMalta annual conference at the end of April 2010.

The financial services industry grew by 22% in 2009. In order to achieve the government’s aim of raising its contribution to GDP from 12% to 25% by 2015, Malta must make more effort to promote itself internationally in order to continue to attract investors.

“Our biggest challenge is that people don’t know about us,” Gonzi said. “Malta needs to be out there more.”

In the government’s Vision 2015 plan, supported by all postglacial parties, the financial services sector plays a major role. The sector has seen unprecedented growth over the last few years, with the registration of hundreds of companies and the generation of thousands of jobs in Malta.

Financial services already account for over 12% of Malta’s gross domestic product (GDP), almost half way to its goal of 25% by 2015.

 The government’s idea is to strengthen Malta’s position as an important financial services  centre in the Euro-Mediterranean region.

Economic plans are designed to stimulate economic activity by incentivising work and encouraging demand. The aim is to shift the current deficit into surplus by 2011. The government concedes this is an ambitious aim but one that government believes can be achieved. Public expenditure continues to be restricted, although spending on social services, healthcare and education is continuing.

Education in particular is a priority with programmes aimed at increasing existing levels of education and training. The government is also keen to encourage more women back into the workforce as well as promoting retraining for industries that are closing or in new areas of development, like financial services.

The government is also keen to cut red tape and bureaucracy to ensure Malta remains competitive. All political parties believe government should not interfere in any economic activity that can be regulated effectively and efficiently by market forces. “Government respects the role played by business, trade and industry associations. It sees its role as that of regulator and co-ordinator,” it states in the vision 2015 document.

Malta first choice as Mediterranean fund domiciles

Is Malta a viable alternative to Luxembourg and Ireland as a centre for manager migration, fund servicing and domiciliation? A survey of investors’ and fund managers’ views on these areas found that a majority of investors say it makes little difference to them where the funds that they allocate to are domiciled. However, a sizeable minority (30%) prefer EU-based funds.

This rise in interest in fund domiciliation was attributed to the fact that investors are aware that the regulatory climate is changing in both the European Union with the alternative investment fund managers (AIFM) directive and in the US with implementation of the Dodd-Frank Act. Domiciliation is an integral part of these changes.

The majority (62%) of alternative managers interviewed either have or are planning to redomicile their funds or launch new funds in the EU. Of these, 18% have redomiciled funds or are planning to while 44% have launched EU domiciled mirror funds or are planning to.

Malta is the best-known Mediterranean fund domicile, with 76% of respondents aware that it is an option for those looking for a base in the EU. Managers are looking to use Malta either as a base for their funds or as a place to open an office, or both.

A poll taken at a conference attended by Finance Malta in the third quarter of 2010 asked fund managers for their views on Gibraltar, Ireland, Luxembourg and Malta as hedge fund domiciles. This survey found that what matters to investors is that the domicile in question is well known. Investors interviewed at the time said they preferred well-known domiciles that are used substantially by other investors and managers.

The majority of investors (83%) said they were aware that Malta was becoming a commonly used alternative to Ireland and Luxembourg. Gibraltar is less well known by professional allocators.

Investors say post crisis they are conducting more intensive due diligence on managers including fund of funds for which they want more information on the underlying managers.

The recent proliferation of Ucits hedge funds and the ramifications this category of investment products has for the Mediterranean was another reason given for doing the research.

Only 4% of managers think the UK and the US will be as dominant in the alternative fund industry in the future while a vast majority (96%) believe this business will be run out of a broader range of locations.

A majority (66%) of managers surveyed say they are considering or “possibly considering” leaving the UK. Of these, 23% say they are likely to go in the next two years.

Tax is the most important driver for wanting to leave, according to 71% of respondents, followed by concerns over the AIFM directive (35%).

The research, undertaken by International Fund Investment, asked 70 alternative fund and fund of fund managers and 30 investors between July and October 2010 what they though about fund servicing and domiciliation in the Mediterranean. Investors interviewed included many of the largest and most experienced allocators with combined total invested assets of $971 billion with approximately 9.7% of this amount invested in hedge funds.

* The future of manager migration, fund servicing and domiciliation in the Mediterranean: the alternative to Ireland and Luxembourg? A survey of investor and fund manager views on domiciliation, migration & fund servicing in the Mediterranean, October 2010.

Malta’s collective investment schemes in 2010

The number of all professional investment fund (PIF) registrations in the first half of 2010 continued to increase from 285 licences in December 2009 to 329 licences in June 2010, a net increase of 44 licences or 15%, over December 2009. In the first six months of 2010, the MFSA licensed a total of 49 collective investment schemes (CIS), all for PIFs of which 48 targeted qualifying investors and one experienced investors.

At end June 2010 the aggregate net asset value (NAV) of Malta domiciled funds (PIFs, Ucits and non-Ucits) reached €7.93 billion ($10.44 billion). This represents an increase of almost €900 million ($1.19 billion) or 13% over December 2009. The increase in NAV was contributed by a range of funds which are slowly recovering from the financial crises together with a number of new funds which started operating during 2010.

The NAV of PIFs reached €5.2 billion ($6.8 billion) on June 2010, an increase of almost €1 billion ($1.3 billion) in the first six months of 2010 but €800 million ($1.1 billion) less than the highest level reached in June 2008. About €780 million ($1.03 billion) or 80% of the €1 billion (increase in NAV over the six months of 2010 was contributed from new PIFs registered in 2010.

As at June 2010, diversified funds were the largest asset category, accounting for almost 51% of all the locally based Malta-domiciled funds. Equity funds were the second most common category with a share of 19% of the total number of funds. Derivative funds accounted for 12% of the total number funds. The largest number of funds registered was in the mixed and equity sectors. There were no new authorisations for money market funds during the first six months of 2010, while there were only one bond fund and one derivative fund licensed during the period.