Luxembourg and Ireland are the main locations for the domicile of Ucits hedge funds. While the Irish fund industry is known more for expertise in traditional hedge funds, it is gaining in prominence.

Luxembourg and Ireland are the main locations for the domicile of Ucits hedge funds. This should come as no surprise. Luxembourg has been the dominant jurisdiction, having had a headstart mainly through the retail side. Although Ireland came a bit later to the Ucits hedge fund sector, it has been impressive in its attempts to catch up with leader ­Luxembourg.

While Luxembourg was first off the mark in touting for Ucits business, Ireland has been no laggard in trying to attract more business. The Irish funds industry believes its expertise in traditional hedge funds should give it an edge in attracting hedge fund Ucits. Many say US managers in particular will be more attracted to Ireland simply because of the use of the English language compared with what is commonly thought of as a more complex and bureaucratic approach by French-speaking ­Luxembourg.

Overall, total fund assets domiciled in Ireland have grown at an average annual rate of 17% since 2000 compared with 10% in Luxembourg. Looking at Europe as a whole, Luxembourg as a domicile for European investment funds accounts for 27.4% of the market with €2.2 trillion ($3 ­trillion).

Ireland comes in at fourth place (behind Germany and France) with €1.1 trillion ($1.5 trillion) net assets and a 14% market share, according to the European Fund and Asset Management Association (EFAMA). Although these numbers refer to all funds and not just Ucits, it gives a flavour of the divide between the two jurisdictions. If growth rates continue at a similar pace, Luxembourg and Dublin will between them account for almost €5 trillion ($6.8 trillion) in domiciled funds by 2014, according to figures from the UK-based Investment Management Association (IMA) and EFAMA.

Ucits has changed the funds map of Europe. The investment powers detailed in Ucits III and clarified with the eligible assets directive of March 2007 has seen a flurry of discussions relating to the current size and growth of absolute return Ucits or those that run a hedge fund-like structure.

While the regulations have been seized on as a way for hedge fund managers to expand distribution, there has been little evidence of this being translated into sales flows. Instead the assets flowing into hedge fund Ucits have been driven by existing hedge fund clients wanting the reassurance of the Ucits brand although that is set to change a bit, predict some market observers, as Ucits hedge funds become available to investors restricted to onshore, regulated products.

With its growing popularity in the aftermath of the financial crisis and with hedge fund managers beginning to see the advantages of a Ucits wrapper for some strategies, the numbers have grown – and so has the rivalry between the two main jurisdictions.

Although both Luxembourg and Ireland are careful to avoid public criticism of each other and put on a show of European solidarity, the competition is fierce. For both there is a lot at stake.

Europe has undergone remarkable change in terms of asset management topography. After two decades or more of Ucits and two severe market crashes, Europe’s fund industry is evolving.

There is considerable cross-border penetration in individual European markets despite recent market problems. The assets of cross-border groups are accumulating at a faster rate than those operating in just a single market, according to a report by Lipper FMI for the Association of the Luxembourg Fund Industry (Alfi).

Over the last 20 years, Luxembourg has played a pivotal role in realising the success of Ucits. It has helped the Ucits framework to be seen as a suitable regulatory standard for distribution in non-US markets around the globe.

Although the intention of the Ucits directive was to facilitate cross-border trade of investment funds in the European Union, the outcome has been global with the EU becoming the centre of international investment in mutual funds with Luxembourg in the middle of this activity.

The cross-border evolution, once almost entirely a Luxembourg story, now includes non-domestic expansion from funds that previously only addressed local market appetite, says Lipper. “Borders have become blurred and in most countries fund buyers are agnostic about where their funds are based as long as they carry the Ucits brand.”

The drive for efficiencies has already spurred many groups to consolidate their fund ranges into a single manufacturing centre. Ucits IV should also help speed up consolidation.

Although some groups, particularly those that are just beginning to venture abroad, are expected to use their existing structures, most of the more mature groups have gravitated towards Luxembourg where their original cross-border funds were based. This has helped to expand Luxembourg’s role in the fund industry and it is this feature of consolidation and convenience that will prove important as competition for assets builds in the future, concludes the Lipper report.

That does not mean Ireland has been left totally behind. Over the past 10 years domiciles in Ireland have increased by an average 7% a year compared with 6% in Luxembourg. This momentum would be difficult to reverse, according to the IMA.

Irish funds recorded the highest level of net inflows in Europe in the first half of 2011, according to the latest EFAMA statistics. Ireland had net inflows of €39 billion ($53.2 billion) in the first six months of 2011, about €7 billion ($9.5 billion) more than the next closest domicile, Luxembourg.

The most impressive gains for Ireland were in the second quarter when Ireland reported net inflows of €26 billion ($35.5 billion), representing growth of 1.5% over the period.

All other major domiciles experienced decreases in net assets during the quarter with total Ucits net assets down 0.5%.

This means Ireland’s market share has now increased to 13% compared with 11.5% in 2010.

Over the past 10 years, the net assets of Irish Ucits have grown by a whopping 422%. Ireland remains the fastest growing of the major cross-border Ucits domiciles according to EFAMA statistics at end of December 2010. In 2010 the net assets of Irish Ucits grew by 27%.

The net assets of Irish-domiciled Ucits funds grew by 51% between 2004 and 2008; The European average for the same period was 10%, according to the Central Bank of Ireland and EFAMA.

“This growth highlights the strength and attractiveness of Irish funds as investment opportunities for investors throughout the world and in fact demonstrates that Ireland is the location of choice for Ucits funds,” says a confident Gary Palmer, chief executive of the Irish Funds Industry Association.

More information on domiciles

Documents needed to set up a Ucits fund

Ireland
Prospectus (plus supplements if required).
Simplified prospectus
Articles of association/trust deed/deed of constitution.
Form A1 for incorporation of the venture capital corporation (VCC).
Investment management agreement.
Custodian agreement/trust deed.
Administration agreement.
Any other agreements with service providers.
Documents regarding the promoter (unless previously approved as a promoter): CVs of key individual (if newly established); shareholder information; group structure information; latest audited accounts and confirmation of the level of capital (if newly established). If promoter is also acting as investment manager, no further application is needed for authorisation as an ­investment manager.
If the investment manager is a separate entity to the promoted and is not already authorised, applications that need to be considered include; documents regarding the investment manager where not previously approved by the regulator and passporting a home state investment services directive (ISD) authorisation; the latest annual report/auditor’s confirmation of the level of capital; and CVs of key personnel and group structure information.
Risk management process, required by regulator for all Ucits funds.
Business plan required by the regulator for all new Ucits funds except where management company already established as a business plan and filed for the management company.
Regulator application form required for Ucits management company or self-managed VCC must include a certified confirmation from the board of directors of either entity in respect of the capitalisation requirements. The directors’ confirmation must stipulate the form and amount of capital and the name of the subscriber and be accompanied by an original bank statement evidencing this.

Luxembourg
Full prospectus plus supplements if required.
Simplified prospectus.
Articles of incorporation of a Sicav/management company.
Management regulations of a FCP (fonds commun de placement).
Investment management agreement.
Custodian agreement.
Central administration (registrar, transfer agent, domiciliation agent) agreement.
Any other agreements with service ­providers.
Documents regarding each promoter and the investment manager include: articles of incorporation, three latest annual reports and copy of licence granted by home country authority.
Board minutes for launch meeting.
Risk management process.
CVs of board members of the Sicav/management company.
Application pack including, among other items, organisational structure of the Ucits, anti-money laundering and know your client procedures, conducting officer reporting and service level review meetings, CVs of conducting officers and details of auditors.