Hedge fund firm opens EU fund to keep insurance client

LONDON Mon Oct 14, 2013 7:01am EDT

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LONDON (Reuters) - Hedge fund firm Finisterre Capital has launched an EU-regulated fund after one of its insurance clients threatened to pull out its money from an existing fund because new industry rules will make it more expensive to invest in unregulated products.

The European Union's proposed Solvency II capital rules for insurers, due to come into force in 2016, are expected to require companies to set aside more capital when investing in hedge funds that are registered offshore in places like the Cayman Islands and not regulated by the EU, the structure used by most hedge fund firms.

As a result London-based Finisterre, which runs $1.75 billion across three existing offshore funds, said a UK insurance client had been set to pull its investment but has now moved the money to its newly-launched fund, a so-called Ucits-compliant fund that is regulated by the EU.

Ucits, or Undertakings for Collective Investments in Transferable Securities, is the European regulatory framework for funds that can be sold across Europe to a range of investors, including retail. They offer better liquidity terms than traditional hedge funds, giving investors quicker access to their money, as well as greater transparency.

The move highlights the need for hedge funds to offer onshore regulated products if they are to hang on to insurance clients, a key investor group for the industry.

"We believe this will appeal to other insurance investors, particularly in Asia and Europe, because of the Solvency II regulations," said Paul Crean, who co-founded the emerging markets-focused manager in 2002.

But while Ucits allow funds access to new - or the ability to keep existing - sources of capital, they come with strings attached: funds cannot short bonds, for example, and they are required to be better diversified than unregulated hedge funds.

Limits on the tools hedge funds have at their disposal also means many charge their clients lower fees. Finisterre is charging an annual 1.5 percent annual fee and taking 15 percent of all gains on the new fund - down from the typical "2 and 20 percent" it charges on its existing three offshore funds.

"The fund will have slightly lower returns, slightly less leverage and probably less volatility," Crean said.

Assets under management in Ucits funds has grown since the financial crisis - according to Alix Capital they have risen to 174 billion euros from 97 billion euros in January 2011.

But others have struggled with the limits on what they can do under the Ucits wrapper.

Earlier this year Cantab Capital closed its Ucits fund because of new European guidelines regulating investment in commodities, while Bluecrest Capital shut its Bluetrend Ucits fund in 2010 because of its inability to replicate sufficiently its main offshore portfolio.

(Editing by Greg Mahlich)

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