Declan Quilligan discusses the current state of the hedge fund industry in Europe and how the role of the hedge fund manager has evolved
What does your role as EU head of hedge funds entail?
Our global strategy is to remain a pre-eminent asset service globally and my role is to ensure that we continue to achieve that goal for our European hedge fund offering.
A significant part of my role is making sure that we anticipate the changing needs of our client base so as to ensure that our offering evolves to satisfy not just current needs but also future needs of our client base.
My role involves staying ahead of industry developments to enable us to develop innovative solutions to bring to the marketplace to better assist our clients. Ultimately, we are looking to grow our business and remain profitable.
Our goal is to remain nimble in adapting to what we all appreciate is an ever-changing environment with constant regulatory change and developments in technology. Our client and investor needs are at the forefront of our thinking.
Last year was an ‘exceptional year’ for the European investment fund industry, according to the European Fund and Asset Management Association, as its Q4 2017 results showed. What factors do you think made it an exceptional year?
Our experience of the hedge fund industry last year was that there were net capital outflows quarter upon quarter. However, the performance across the board more than compensated for this outflow.
Towards the end of last year, outflows were stemmed and 2018 commenced with positive inflows.
It does appear that a corner has been turned in terms of new startup activity and that could be down to a combination of factors, the performance of the overall European economy, and the fact that some of the more significant and far-reaching regulation, such as Alternative Investment Fund Managers Directive (AIFMD) is now maturing and managers are concentrating on new strategies and new products.
Of the largest UCITS domiciles in 2017, Ireland recorded the largest net asset increase at 15.9 percent. Why is Ireland such a strong market, in particular?
Ireland is performing strongly for a number of reasons. The fund industry is a mature and stable proposition with the Irish Financial Services Centre (IFSC) now over 20 years in existence and with most top-tier service providers in fund administration, auditing and the legal profession situated in Ireland. Being English speaking is an attractive proposition for UK and US managers especially.
The industry works well with policymakers in terms of new products, and bringing new products to the table, an example being the Irish Collective Asset-Management Vehicle (ICAV) structure, which is proving to be very successful. Looking over the last number of years, certainly Ireland would be seen as a business-friendly jurisdiction.
The other major plus is the pool of talent. In Ireland each year, there’s a significant pool of highly educated graduate talent coming through into the workplace. Ireland, demographically compared to other countries, has a significantly younger population and as such is attractive from an employer standpoint.
AIFMD is an EU directive that places hedge funds, private equity and other alternative investment firms into a regulated framework. How has it affected the work you do since its first implementation back in 2011?
AIFMD certainly is double-edged. In Europe, we already had the UCITS framework in place, but the UCITS regime is primarily targeted at providing protection to a retail investor base. Then you look at AIFMD, which is targeted at the alternative space and professional investors. An objective of AIFMD was to provide greater protection to these investors, even though these investors are institutional in nature.
A requirement for depositary services was also introduced via AIFMD, which again was a feature of the UCITS regime. Introducing that requirement for hedge funds with a non-retail investor base was viewed as unnecessary by a proportion of institutional investors.
After many years and significant efforts by the industry to promote independent valuation, AIFMD references the responsibility of the manager in valuation, which again raised eyebrows even with the introduction of a provision for an external valuer, a role which Citco is happy to take on.
What kind of effect could Brexit have on EU fund services when the UK leaves the EU in March 2019?
Brexit is the real elephant in the room, and there is still so much uncertainty. One has to assume that financial services will be part of any transitional arrangement that is finalised. A transitional arrangement will provide the industry with some breathing space to gain the clarity that is necessary because investors will want little to change, they will want to be able to access UK managers that they access today and similarly the UK managers will want to access the investor base they have always accessed.
There is then the whole concept of ‘equivalence’ which if a positive determination is reached, will allow UK managers to continue to provide services into the EU on condition that the rules in place in the UK have been deemed equivalent to those of the EU.
If an agreement on equivalence is reached, my hope is that the ability to distribute will continue in much the same way as distribution takes place today. The AIFMD non-EU passport has been up for much discussion in the last couple of years, but there is still significant uncertainty as regards to when that’s going to come into being.
With lack of clarity around substance in setting up an operation outside of the UK, there are opportunities for regulatory arbitrage to happen which is not in anyone’s best interest. Some clients are looking at Ireland and Luxembourg to set up operation, but the industry as a whole is waiting for greater clarity before anything happens en masse.
What challenges do you see for fund services and asset servicing in 2018?
As the industry has recovered post-financial crisis, the hedge fund manager has evolved into a more diversified manager. Nowadays, the manager manages more products, more strategies and has maybe extended into private equity, real estate and long-only strategies. Servicing these managers and adding most value along the way necessitates reporting on a consolidated basis across product and strategy.
The challenge for administrators is to become true multi-asset servicers, and certainly, Citco with its state of the art portal, Citco One and its ability to provide data analytics and dashboard reporting by product, sector and strategy is meeting that challenge head-on. Also, the challenge is to provide a true global 24/5 model and global organisations like Citco with a presence in North America, Europe and Asia are at an advantage.
All stakeholders in the industry are looking at their cost base and that presents both challenges and opportunities. Cost of compliance for all stakeholders has increased significantly on the one hand and on the other hand, there is much more focus on total expense ratios. Citco works with clients to help understand the nature of their costs and provide tailored outsourcing solutions to reduce costs.
Leveraging our global service delivery model to meet service level agreements agreed with our clients effectively is an important component of our solution.
First published in asset servicing times, Issue 192, 13 June 2018