Archive for 2008

South African government officials have been in the UK this week drumming up business for a nascent industry seeking outsourcing and offshoring contracts from fund management firms.

Industry insiders even predict that South Africa regulators will seek to embed the EU’s Ucits III rules into the country’s financial infrastructure in a concerted bid to attract European clients.

Speaking at South Africa House in London on Wednesday, the deputy director general of South Africa’s department of trade and industry, Iqbal Sharma, argued that the country is well placed to compete with financial jurisdictions such as Luxembourg and Dublin.

Noting that this was the country’s first effort to attract UK funds to its back-office industry, Sharma called South Africa ‘one of the most sophisticated and promising emerging markets’.

South Africa’s high commissioner, Lindiwe Mabuza, said the legacy of a long-standing and vibrant mining industry has supplied a well established and mature financial centre. She also highlighted a low-cost labour force and favourable space/cost property ratio – as well as a modest two hour time difference from GMT.

This week might have marked the first foray into the UK market, but there has already been some success in the U.S. Large international players which already outsource their financial back-office services include JPMorgan, Close Brothers and State Street, according to Dale Lippstreu, managing director at Maitland Fund Services in South Africa.

Maitland provides third party administration, accounting and offshore services for both institutions and alternatives funds from Cape Town at the southern tip of South Africa.

Lippstreu told Thomson IM News: ‘We’re seeing the combination of the drive towards outsourcing, which is now the dominant trend, increasing acceptance of offshore (operations) and South Africa being well placed to provide a very competitive product, both in terms of price and service.’

Lippstreu added South Africa is not immediately looking to compete with Luxembourg and Dublin in terms of jurisdiction domiciles; at present it is primarily aiming to undercut back-office costs.

‘Our staff cost in Luxembourg are two and a half times higher than they are in Cape Town. Accommodation costs about four and a half times higher,’ he said.

Nevertheless, the country does eventually seem to be looking to compete for fund domiciles as its regulator, the Financial Services Board (FSA), looks to Ucits III as a template for many rules being implemented at the moment, Lippstreu added.

He said: ‘All that South Africa has to do is render services that are Ucits III compliant, it doesn’t have to have adopted Ucits itself. We’re moving towards Ucits even though we don’t have to.’

The European Union’s Ucits legislation has been designed to offer a harmonised set of rules allowing funds to operate freely throughout the EU on the basis of authorisation from one member state.

By Ingrid Smith: +44 (0) 20 7422 4955; ingrid.smith@thomsonreuters.com.

Source:Thomson Investment Management News

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The quality of Russian corporate governance came under fire again today and opened the debate amongst fund managers as BP-TNK’s CEO Robert Dudley announced he has been denied leave to renew his visa; British Petroleum has accused Russian shareholders of “sustained harassment” towards him.

       BP said the Russian shareholder consortium, Alfa Access Renova (AAR), – which owns 50 percent of BP-TNK – is manoeuvring for overall control of the joint operation in a show of strong-arm shareholder activism.      
    However, BP’s criticisms of both corporate and government dealings in relation to business ventures in Russia are not shared by some other UK investors, such as Mike de Haaff – director of Equinox Finance Management Ltd – a hedge fund currently domiciled in Guernsey with investment interests in Russia.
    De Haaff told me that, while there are some concerns over the region, he views it as “a country with a positive outlook”, for both investment opportunities and improved corporate governance.
    Equinox currently operates a Russian opportunities fund and said in June that it was considering the launch of a private equity style vehicle to take advantage of an infrastructure programme, set to be launched by President Dmitry Medvedev’s government in 2010.
    Opposing this positive outlook is William Browder, CEO of Hermitage Capital Management, who was a critic of Russian corporate governance operations even while he ran a $4 billion hedge fund in the country. His criticism of both the state and investors led, like Dudley, to non-renewal of his visa in November, 2005.  
    He has described Russia as a place which has moved from “chaos to anarchy”, and said Dudley should prepare “for worse things to come”.
    “With so much money around people get crazy with greed,” he said.   De Haaff, while conceding that Browder has had some difficult experiences in the country, said he views the picture as “far less pessimistic.”
    His firm is continuing with its private equity planned launched, which he said will now probably go ahead during Q4.

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The European Commission has postponed the ratification of the Ucits IV draft directive, according to an official from the Committee of European Securities’ Regulators.

The CESR source told Thomson Investment Management News on Thursday that there is no indication of when a new date might be set. An announcement from the College of European Commissioners on the ratification had been scheduled for April 30.

CESR has been advising the EU on the issue.

This follows an announcement in Dublin on April 1 by Didier Millerot – a member of the EU Internal Markets Committee – that the decision had been made not to introduce a full management company passport as part of the updated legislation.

At present, the Ucits directive allows funds to be marketed – and to a lesser degree operational practises to be shared – cross-border. The aim of the full passport was to allow trading cross-border, but opposition from jurisdictions like Dublin and Luxembourg, among other issues, succeeded in halting the process.

In what has become a rather ramshackle introduction of the latest revision to the directive, industry players have raised issues about different elements which are giving cause for concern within the draft.

Gavin Gray, managing director of administrators firm, Phoenix Fund Services, told Thomson IM News that the proposals around pooling in the draft seem flawed. He said: ‘To some degree you get the sense that they (the EU) are not doing enough in that area.’

Gray said that the directive proposes 85 percent of pooled funds must be held in a master, and that the master will need to be approved as a Ucits master. He argues this requirement would reduce the potential for investment in this area.

He would rather see feeders being allowed to invest in multiple masters, with investments around the 20 percent mark rather than 85 for each feeder.

He argues: ‘This would to allow a greater multi-manager type-product to really work for Ucits.’

Gray is also disappointed at the EU’s failure to agree on the introduction of a full passport – he said: ‘I think it would pull a lot more people into the Ucits product.’

The focus of Phoenix’ fund clients is primarily long-short equity: ‘Japanese long-short, global long-short, some event driven,’ Gray said.

Phoenix has an office in Chelmsford, UK, while its hedge fund servicing operations are centered on Dublin. The group has $12.5 billion of funds under management of which $2.5 billion are alternative assets.

On March 5 the firm announced the launch of its UK investment scheme administration operations, providing services to UK collective investment schemes (CIS), under Stuart Mathieson.

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 Mehraj Mattoo is indisputably one of the leading lights in alternatives investment management and, as the Global head of Commerzbank’s hedge fund of funds investment strategies – Comas – is on a crusade to divest traditional fund of hedge funds of out-dated practises.
    Mattoo began heading-up Comas in April 2006; the division now operates a “unique business model… setting the scene for how the fund of funds industry will evolve”, he told Thomson Investment Management News.
    The funds’ head argues that an ‘out-dated’ model for fohfs assumes  investors are only interested in diversification and want to shun risk – something he challenges strongly.
    He said: “The reason investors come to us is because they want exposure to hedge funds… and we have to deliver returns that are reflective of the hedge funds industry, not reflective of Treasuries.”
    And, to avoid mediocre returns, Comas has made active asset management part of its investment process: “We can’t hide behind diversification and still demand 1 and 10,”, Mattoo said, referring to the layer of management and performance fees fofs typically charge on top of hedge fund fees.
    “Much of the funds of funds industry is still rooted in a very simplistic view of the world,” he argues.
    “Under the old model you go through databases, short list managers using some criteria; perform due diligence on short listed managers – (if) you like a hedge fund you put them in the pot.”
    This out-dated process is still being practised by a number of fofs, he said, with analysts making recommendations to their investment committees irrespective of what incremental value the managers adds or what additional risks are bing introduced into the portfolio.
    Mattoo also argues funds of hedge funds (fohfs) initially became popular because investors had no idea where to start when considering allocations to hedge funds: “Fund of funds had the knowledge advantage as there was no yellow pages investors could lay there hands on,” he said. 
    Now things have changed, he said, especially amongst institutions – the core of Comas’ investors – which no-longer need hand-holding.
    And, he sees much of hedge fund growth in the future coming from pension funds and insurance companies, as opposed to high net worth (HNW) individuals.
    In preparation for this, Comas’ new approach includes the offer of a flexible and diverse platform for investors, he said, including multi-strategy and single strategy fund of hedge funds – as well as more tailored solutions to large investors.
    Having done away with the concept of a single portfolio management team run by a CIO, Comas has three distinct portfolio management teams; each specialising in a particular strategy or related strategies.
    “We have invested in a diverse skill set which is reflective of the complexity and diversity of the underlying hedge funds industry,” Mattoo said.
    An advantage of creating specialist portfolio management teams is that they add value across the board to Comas’s multi-strategy products, as the single strat teams are jointly responsible for the management of all multi-strategy funds, he added.
    “What that means is the credit part of the multi-strat product benefits very significantly from the expertise of the fixed income team, as credit is their bread and butter.”
    The second most important change Mattoo said he has made is to Comas’ operational processes.
    He has introduced an additional degree of corporate governance by ensuring the independence of due diligence from portfolio management, creating an investment committee in which five of the seven members are non-Comas global trading heads of the bank. 
    “Hedge funds have become more complex and the number has increased dramatically,” Mattoo said.
    Given that, there is a much greater need for a far more sophisticated and disciplined processes in business, he argues: “The kind of discipline you take for granted in the traditional asset management industry, or, for that matter, any other industry.”   
    He added, it is currently the opaque nature of hedge funds that causes the most concern for investors.
    “Most of the time it’s like going down a blind alley,” he said.   
    Mattoo has directed the development of a number of independent committees since joining Comas, which are designed to up the due diligence and corporate governance groups areas of the business, “to guide us through investments.”
    These include independent, asset allocation; fund selection and risk committees as well as the investment committee.
    Mattoo likens their independence to the independence of corporate governance directors.
    Other independent teams include internal audit and Legal and Compliance.
    “Due diligence is our first line of defence because that’s where things go wrong,” Mattoo said.
    And, most of Comas’ due diligence executives have experience in excess of twenty years: “They have seen it all before which is very important,” he said.
    They are concerned with having particular focus on the risks of business failure, he said.
    Meanwhile, the portfolio management team has plenty of young talent:     “Ultimately, Comas is in the business of creating portfolios of hedge funds – what are hedge funds? Hedge funds are portfolios made up of what used to be proprietary traders but who are now securitized separate legal entities,” he said.
    Given this philosophy, Mattoo said it is not difficult to see why he reports to the head of investment banking, rather than falling under the auspices of the asset management division of the bank – and he views this as  unique for an alternatives division.
    And, he said, to ensure that Comas funds don’t over diversify, the group has invested heavily in technology.
    “If you were to ask me what’s our most important contribution to this new model, the brave new world for funds of funds, it is the use of technology – both analytical as well as IT.”
    Mattoo has put together a team of researchers in conjunction with Imperial College London, and Kings College London, called Portfolio Analytics which is reported to be using artificial intelligence to unravel underlying hedge funds, in Comas’ fohfs structures.    
    “To create portfolios that deliver consistent returns over time we must ensure that we don’t diversify away Alpha. Optimal diversifications means we must determine very precisely the risk and return drivers of each hedge fund in our portfolios.”
    The first project for the Portfolio Analytics unit was to re-classify hedge funds to determine their true style, not the labels given to them by their individual managers.
    “We’ve done it on around 800 hedge funds so far; it takes their (the funds) finger print, their DNA. Taking into account everything; every market that trades, the way humans would if they had perfect memory and unlimited analytical power.”
    He argues that current conventional solutions which exist to deal with problems in the hedge funds industry will no longer suffice. Relying purely on historical data to determine the future performance of a manager and his fund is not enough, Mattoo argues.
    Even quant funds, for all their mathematical complexity, are basically only designed to buy and sell equities, bonds, derivatives.
    He argues further that the type of risk management technology Portfolio Analytics is developing would, in theory, have been able to detect the failings at funds such as Amaranth through an early warning system.
    If Comas had been invested in Amaranth – through one of its multi-strat fohfs – the system would have been able to show during early 2006 that the convertible arbitrage hedge fund was drifting in style; the system would be monitoring every small movement, he said.
    “No statistical model will pick this up because one (month’s) data point is not enough to change the overall picture – this is the problem with statistical inference.” Statistics is about reducing large sets of data to its distributional characteristics and data fits, he said. “What we’re doing is the opposite of that.”
    Therefore, the drift from multi-strategy convertible arbitrage to energy futures would have been detected way ahead of Amaranth’s collapse, in 2006, and quick redemptions could have been made.
    Comas had no allocation to Amaranth.   
    While Mattoo is unable to put a date on it, he said Portfolio Analytics’s artificial intelligence systems will eventually be able to calibrate each hedge hedge fund in terms of all markets that trade as well as the (economic) environment in which they trade.   
    Mattoo told Thomson IM that Comas is aiming to make its practices the new “Holy Grail” for fohfs through predictive optimisation (the best possible outcome), as opposed to optimising portfolios on the back of historical returns.
    “Fofs who are still rooted in the traditional model are going to suffer very significantly and there’s going to be a shift away from that… as fofs like ours start to perform significantly better… and have institutional ownership,” he said.
    Ultimately, Mattoo wants everyone to think of fohfs as “super hedge funds”, delivering value specifically in terms of risk adjusted returns.
    Comas was founded in 1999 and currently has seven fund of hedge funds. Its largest fund is the CGALE Comas Global Alternatives, a multi-strategy fund, which was re-domiciled in Dublin in 2007 but was originally launched in 2000.
    It currently has over $600 million in assets under management and has  grown nearly fifteen fold since being re-domiciled, Mattoo said. CGAL also ranked number 1 and 2 respectively in 2006 and 2007 among its peer group, in terms of risk-adjusted returns.
    Comas has $1.37 billion of AuM in total at the end of Q1, having almost doubled that figure from $700 million since the end of July 2007.
    Amongst this a $0.45 billion from retail investments.  And, of current assets, $0.92 billion is managed for institutional clients, with the vast majority of monies invested across its CGAL, CGALE, CAS, CGO and CFIX funds being institutional money.
    Comas declined to disclosed the names of its institutional clients.

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Almost immediately, on the back of UK ChancellorAlistair Darling’s announcement on non-domicle taxation during his maiden budget speech yesterday, off-shore hedge fund managers have been hitting the phones – not least to this reporter – asking where they stand, and what they should do next.  

Ironically, this confusion comes in conjuction with comments from the UK Law society, which today has accused the Treasury of failing to demonstrate the will to legislate effectively through the new measures.

By Ingrid Smith

The UK Chancellor of the Exchequer, Alistair Darling said during his maiden Budget speech that it is ‘right and fair’ to establish a tax regime which targets non-domiciled individuals.

He said that the regime – which includes a 30,000 stg annual charge on foreign income and gains they leave outside the UK – will apply after seven years of operating business in the UK and will take effect from April this year.

The measures have been predicted to hit the hedge fund industry hard. Before the budget speech, the Alternative Investment Management Association (Aima) urged the Treasury to reconsider its planned measures to tackle non-doms.

In a letter responding to the Treasury’s consultation on residence and domicile, Aima said the measures could result in a reduction in overall UK tax revenues by causing non-UK domiciled hedge fund managers to relocate to other jurisdictions, and put others off setting up hedge funds in the UK.

The 30,000 stg charge will be income tax or capital gains tax and treated as such in accordance with double taxation agreements, the statement said.

This tax will also be available to cover gift aid donations.

However, the charge will not apply if these individuals un-remitted foreign income and gains are less than 2,000 stg per year.

In addition, people using the remittance basis of taxation will no longer be entitled to personal allowances, unless again they have un-remitted foreign income and gains of less than 2,000 stg per year.

The budget statement said: ‘Loopholes and anomalies in the remittance basis rules will be removed, to ensure that the remittance basis works as originally intended and can no longer be used as a vehicle for avoiding UK tax. Income and gains of offshore trusts will be taxed only when they are remitted to the UK, even if these relate to UK assets.’

The government has already made some concessions from its original proposals and will no longer ask for detailed information about offshore trusts, and will not tax works of art brought into the UK for public display or money brought into the UK to pay the levy.

Darling told parliament today that there would be no additional change to this legislation in this parliament or next.

He added that the government ‘will continue to be vigilant against tax avoidance and ensure fairness for all tax payers.’

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European asset managers gathered in London this week to discuss, amongst other things, UCITS IV and the much-muted full management company passport.  They were not happy – particularly as some openly felt the European Commission has allowed itself to be bullied into back-tracking on a promise to make this revolutionary regulatory change.

By Ingrid Smith

Wednesday February 12, 2008

A number of European fund managers are focusing their minds on the fourth stage of the UCITS directive and its goal to introduce a full management company passport – as concerns grow that the European Commission may back-pedal on the initiative under pressure from established UCITS jurisdictions such as Dublin and Luxembourg.
    A full passport would allow a fund manager based in one member state to run and trade funds in another; at the moment UCITS III only allows funds to be marketed cross-border while also broadening the scope of investments.
    One manager in favour of a full offering is John Baptiste de Franssu – CEO of asset manager Invesco Continental Europe – who made his concerns known at the Future of Fund Management conference in London.
    Baptiste de Franssu – who is also vice president of the European Fund and Asset Management Association (Efama) – only has praise for the UCITS initiative so far, now over 20 years old. He describes the initiative as a “global brand” and regards stage three as a development that responded to investor demands for sophisticated products: “Regulation sticking to market demand.”
    And he told delegates: “It is important to realise that there is no better proxy than UCITS regarding regulatory change.”
    Baptiste de Franssu said the UCITS market has grown by 5 times its original size over the last 12 years. “UCITS accounts for 80 pct of of European funds… almost reaching the size of the US mutual fund market.”
    But, given rumours of late changes that may be made to the fourth stage of UCITS, he is now critical.
    He said: “UCITS IV needs to define the right product wrapper for industry,” and this can only be achieved through a full management company passport.
    “The impact of UCITS IV on the industry will be significant in terms of leverage and optimisation… and we have to hope for the passport because it is needed for the pooling of funds” cross border.
    Asked by delegates whether he felt there is a need for a “common regulator in Europe,” he said: “Getting common ground with CESR (Committee of European Securities Regulators) is the way forward.”
    The Forum of European Asset Management (Feam) has said it is also in favour of a full passport, joining with regulators in countries including France, Germany and the UK.
    In response to reports that a full passport may be ditched, an official said Feam proposes that the commission initially introduce a partial passport – under which certain responsibilities would remain with the member state where the fund was domiciled – but make clear that this is only an intermediate step towards a full passport.
    But Dublin and Luxembourg regulators argue a full passport would involve the loss of regulatory oversight by local regulators.
    This stance is challenged by Mark Connolly, executive director for sales and client services at Standard Life Investments (SLI).
    Speaking at the conference, he emphasised to asset managers “the need to push for the full passport, to allow services to be delivered centrally not locally.”
    Like many other managers he feels a fund’s administrative location should be determined by where that fund feels its requirements are best served.
    This argument is strongly supported by Michael Rothwell, managing director for LaSalle Global Fund Services, based in Jersey.
    LaSalle is a specialist administrator to the alternatives fund industry including hedge funds, private equity, real estate funds and fund of funds; it is a subsidiary of the Bank of America.
    In an interview with Thomson Investment Management News, Rothwell said the core arguments surrounding the introduction of a partial or full passport centre around the shareholder registers in particular jurisdictions, and the location of funds’ administration.
    “To date… the jurisdiction in which the fund was domiciled has often placed restrictions on where the administration is,” he said.
    He added that the Luxembourg regulator wants to have the share register maintained in that jurisdiction, “presumably to know who is an investor in a Luxembourg domiciled fund.”
    He argues that a partial passport offering would be unattractive because it would require a fund to either operate in a jurisdiction where it had set up a fund, or, “if you believe for example that there’s another location offering better administration… set up administration in two locations.”
    This, Rothwell said, is obviously going to impact on cost, “and, I would argue, impact in terms of risk… Obviously it increases constant risk to be running administration in more than one location for a particular fund.”
    Rothwell said other regulators are far more comfortable with a fund’s administration location being different from where it is based: “Malta, which is also an EU jurisdiction, is quite comfortable with administration on a Maltese fund being able to occur in another location – for example Dublin,” he said.
    The Feam is also in favour of this, calling on the EU commission to allow the consolidation of fund administration in a country which might not be a fund’s domicile.
    Connolly said various regulators’ inability to work together is hurting business, “placing a burden on the industry.” And he is convinced that the full passport proposal has already been removed from the draft version of UCITS IV.
    However, Rothwell remains a little more optimistic. He said: “The hope from probably all areas of the industry would be for a full passport, so that we can domicile management, administration and all the functions in the best locations.”

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