Archive for March, 2008

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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Prepare for the entrance of the small but keen player in the guise of the retail investor who is on the cusp of being granted the key to hedge fund investment – admittedly in the form of a fund of funds structure.

 Particular questions meanwhile need to be asked, and answered – even as the widows and orphans aspire to achieve those elusive Alpha returns.

Such as, can a few tax tweaks from the Treasury prove enough to help ensure the success of these alternatives, and just exactly where are all these specialist advisors going to come from to protect and inform the investor?

By Ingrid Smith

Friday February 22, 2008

The Financial Services Authority today said it is set to introduce retail-oriented Funds of Alternative Investment Funds (Faifs) in the UK, following discussions with the treasury.

In a new consultation paper published today, the watchdog said it is progressing with policy which will enable it to introduce retail-oriented Faifs in the UK.

In November, 2007, the FSA stated there were a number of difficult tax issues involved in the operation of the onshore Faifs regime.

However, Dan Waters, FSA director of retail policy and themes and asset management sector leader, said: ‘Following constructive discussions with the treasury on tax issues we welcome the publication today of their tax framework, setting out a new elective regime which aims to allow Faifs to operate competitively within the UK retail market.’

The government will today publish a tax framework which will deliver a new tax regime for authorised investment funds (Aifs) investing in certain offshore funds.

It will also publish draft regulations for consultation in Spring 2008, which will deliver this tax framework.

The FSA said it has also initiated a further round of consultation on a number of important issues raised by fund managers and other interested parties – and which require resolution before the final regime is introduced.

The regulator released its first consultation paper on Faifs in March, 2007, and was due to report on it at the end of the year before the tax concerns arose.

Waters said: ‘Permitting consumers access to a wider range of innovative investment strategies through authorised onshore vehicles will allow more choice and a better opportunity for risk diversification.’

He added this can be achieved while maintaining consumer protection through the FSA’s proportionate rules on the operation of the product.

‘We aim to make the final adjustments to the new regime before the end of the year, including the additional areas on which we are consulting today’, Waters said.

The FSA also said, to avoid any regulatory regime being used to gain unintended tax advantages, it proposes to include a ‘genuine diversity of ownership’ condition in its rules.

This condition is similar to those proposed in the Property Authorised Investment Funds discussion paper issued by the Treasury in December, 2007.

The new consultation will close on May 22, 2008. The FSA will then finalise the draft rules in light of responses and publish a Policy Statement giving feedback towards the end of the year.

This will set out the finalised rules for Faifs as a whole and the date on which they will come into effect. 

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The UCITS European directive would seem to offer innovation for investors, if only the European Monetary Commission could make the process simpler and cheaper for busy managers and smaller firms with promise.  For now it continues to be  a case of  ’seeking out the expertise of the advisor’ and waiting to see whether that elusive European full cross-border passport will ever emerge.   

Meanwhile financial services providers like Carne group are posed to take up the slack.

By Ingrid Smith 

Wednesday February 27, 2008

Hedge funds have been slow to adopt a UCITS III operational structure compared to more traditional and institutional funds as they baulk at the cost and regulatory requirements, according to Aymeric LeChartier from Carne Global Financial Services Group.

The head of business development at the advisor to European hedge and traditional fund managers told Thomson Investment Management News that the costs involved in implementing the European directive have made it a more difficult step for small boutique houses.

But even the larger hedge funds have chosen to retain their Cayman Island management structure because of the same issues around UCITS III, LeChartier said.

‘The hedge fund world is still a bit reluctant about heavy regulation,’ he added. And, he said: ‘If you’re talking about putting together a UCITS from A-Z for a client it will be almost double the cost of a Cayman fund.’

He argues that, although ‘there’s not a major uptake by hedge funds… (UCITS III) is something that should definitely reshape the industry going forward… the innovative firms have entered that space.’

LeChartier’s comments came as his firm launched a service aimed at ’smoothing the sometimes rocky path’ towards UCITS III authorisation.

The UCITS project aims to allow the marketing of investment funds across the EU, provided the fund and fund managers are registered within an EU member state. The European Commission will publish its draft UCITS directive in the next few weeks amid reported concerns that it may opt not to support the introduction of a full management company passport.

UCITS III also incorporates a so-called product directive which opens up – and regulates – investments in a wider range of financial instruments, including money market, derivatives, index tracking and funds-of-funds.

UCITS funds comprise more than 75 pct of the European fund market, yet according to the EU Commission’s White Paper from the end of 2006, only a relatively small proportion of those are offered cross-border.

Despite the problems highlighted by LeChartier in relation to hedge funds, he argues that the take-up will eventually increase, led by institutions and maturer funds.

LeChartier believes that something approaching a ‘revolution’ is at hand, initiated by the older and larger investment houses with better operational structures in place. They see the heavily regulated directive as a safer ‘alternatives’ bet for ‘the more conservative part of their money.’

He argues these houses will be happier to allocate to alternatives because of reassuring restrictions imposed by UCITS – such as a limited leverage ability and the requirement to have liquid positions.

‘All these restrictions give reinsurance for the fund managers to allocate some of their more conservative portions to a UCITS 130/30… that’s the revolution.’

‘The fact that you can offer an alternative strategy for a more conservative proportion of institutional money will open up the potential market for alternative strategies, and entice houses to put these structures together,’ he argues.

And despite the jittery nature of the market, LeChartier said recent pricing of alternatives shows – through the combined returns of such strategies – that they are faring better than long-only traditional managers.

Carne helps firms structure UCITS vehicles in both Dublin and Luxembourg to meet regulatory requirements under the UCITS III directive.

LeChartier said a significant concern previous expressed by fund managers related to the differing regulatory structures that existed in the two domains.

The Irish regulator had first stated it would allow direct shorting within a UCITS III structure, which was unacceptable to many managers. In contrast, the Luxembourg regulator only allows synthetic shorting through CFDs and other derivatives.

However, the Irish regulator has now backtracked on its direct shorting stance and UCITS III will operate out of that region in line with Luxemborg.

The uncertainty surrounding the regulatory view on direct shorting had ’scared’ some investment houses, he said.

Other areas which firms have found difficult to tackle include the filing of their risk management statements and business plans to the regulator, LeChartier said.

‘That’s where we can add value because of the experience we have, and the relationship we have with the regulators’, he added.

Carne also said it can help firms unfamiliar with UCITS III funds procedures to save time and money.

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