AIFMD to add an alternative string to Luxembourg’s bow

Q With managed assets domiciled in Luxembourg funds at record levels, do you feel the Grand Duchy has made a full recovery from the 2008 crisis?

A Assets under management by Luxembourg-domiciled funds have reached a historic level of €2,383bn under management, representing an increase of 13.7 per cent since the end of 2011 and a new record level for our fund centre. Net sales through the year were €123.1bn. At the end of 2012 there were some 3,841 investment funds domiciled in Luxembourg or 13,420 fund units.

Assets under management have not only grown in Luxembourg but in Europe as a whole, partly due to increasing market values, but also thanks to significant new inflows into investment funds. We are pleased with this return of confidence in investment funds.

In terms of numbers, it thus looks like we are recovering from the crisis. But this is in terms of numbers only. Overall, the framework within which our industry is evolving remains fragile. Costs are increasing and margins are becoming smaller. Asset managers still have to digest the numerous recent regulations that were introduced as a response to the financial crisis. It is the Association of the Luxembourg Fund Industry’s (Alfi) wish that 2013 will allow asset managers to digest these regulations and to concentrate on operational practice to expand their business.

Q Will the new AIFMD (Alternative Investment Fund Managers Directive) European directive on hedge funds and alternative investments have the same impact for Luxembourg as the 1985 Ucits directive on marketing of investments across borders?

A It is Alfi’s priority to help fund managers and institutional investors to leverage the development of regulated European alternative funds, via AIFMD.

A key measure of the AIFMD is the introduction of a European passport for alternative investment fund managers who wish to access the entire European market. Given our position as the European leader in the cross-border space, we expect implementation of the AIFMD to further enhance Luxembourg as a leading domicile for fund and management companies in the alternative sector.

Q Do you expect growth in alternative investments to come from funds re-domiciled from other centres – is this a zero sum game?

A Luxembourg hopes to double the assets in the three main asset classes over the next five years but this doesn’t have to be from players moving business from other domiciles to our fund centre. Indeed, I believe that AIFMD, by offering a regulated framework for alternative funds, will attract new investors to the alternative investment world. However, it is clear that AIFMD offers traditional ‘offshore’ managers an opportunity to relocate to Europe in order to offer their clientele a regulated and more protective environment.

Q While hedge funds complain about excessive regulation, will we now see a bifurcation, where those funds regulated in Europe, with the new AIF seal of approval, can raise plenty of money whereas others will struggle?

A It is true that there were a lot of concerns when the project of AIFMD was first revealed. Then the hard work started, first to make sense of these new regulations, and then to see how we can implement the directive in a pragmatic manner. Today, the acceptance of AIFMD by hedge fund managers and investors is generally higher. I’m confident that this is the right framework to enable alternative fund managers to develop their business.

Q Is the appetite for new Luxembourg-regulated alternative funds in China and Hong Kong as strong as the Asian taste for European cross-border Ucits funds?

A Ucits has indeed become a reference in Asia, as well as in other regions. More than 1,240 Ucits funds are registered in Hong Kong (901 from Luxembourg) and more than 2,100 in Singapore (1,511 from Luxembourg). However, the appetite for Ucits in Asia didn’t appear overnight.  It is a long process. We strongly believe that we can replicate the success of Ucits in the alternative space with AIFMD but we are only at the beginning of the path. Asset managers and regulators in Asia will need to develop a good understanding of this new framework. I believe it is our duty to inform them. We are now focusing more content of our seminars in Asia on AIFMD and are also taking the opportunity to meet with the regulators on our visits to Asia.

Q Is the current situation of regulators in various countries competing with each other healthy for financial services business?

A If financial centers compete to provide the best framework possible for the benefit of all financial services players, it can only be positive, but I think that AIFMD is more about cooperation between regulators than about competition – co-operation between European regulators and co-operation with non-European regulators as illustrated by the recent agreement between the European Securities and Markets Authority and the Brazilian regulator.