Luxembourg to boom as hedge funds move onshore

By Martin de Sa'Pinto

GENEVA (Reuters) - Luxembourg could draw hedge funds in their droves as European investors retreat from offshore vehicles and seek to rein in liquidity and counterparty risk in the post-Madoff, post-Lehman environment.

To meet investor demand, managers in Europe's $300 billion hedge fund industry are eyeing Luxembourg listings for eligible funds. even though tough new European Union proposals to only allow EU-registered funds to be sold may be watered down after fierce opposition from the United Kingdom and others.

"It's more the Madoff effect than the legislation effect, funds now want to come onshore, not be dependent on the offshore market," said Martin Kloeck, a director at Zurich-based fund manager Signina Capital, which manages $600 million.

"Asset managers get the Luxembourg-regulated tag, so why wait to see what new laws might tell us to do?" said Kloeck, whose company is already moving funds to Luxembourg from Cayman.

The Grand Duchy has a multi-lingual workforce and high quality fund services, comprehensive investor protection and a vigilant but flexible regulator, said a January report by professional services firm Deloitte.

It is already drawing funds from offshore centers as major asset managers like Brevan Howard and Marshall Wace register eligible funds onshore in regulated structures like UCITS III or Specialised Investment Fund (SIF) to broaden European appeal.

"It is much easier to sell UCITS- or SIF-compliant funds, they are liquid, the strategies are transparent and they provide solid investor protection," said Salvatore Imperatore, head of London-based investment advisory Pareto Capital International.

Investors turned skittish after fraud by U.S. financier Bernard Madoff and the collapse of Lehman Brothers last year, and demand for transparent onshore vehicles has soared, said Hanna Duer, an associate at independent directors' group The Directors' Office.

The Cayman Islands, home to some 80 percent of the world's around 10,000 hedge funds, could be one major loser.

"Hedge funds and other alternative investment vehicles are now more interested in setting up onshore in Luxembourg because strict rules on liquidity and risk management, and strong regulatory oversight are what investors now want," Duer said.

A GROUNDSWELL MOVE

That would also favor Ireland and Malta, which have like Luxembourg set up their regulatory and tax regimes to attract funds, Duer said, but Ireland's financial crisis is an issue, while Malta is still a relatively small financial center.

Despite the Grand Duchy's advantages, Association of the Luxembourg Fund Industry (ALFI) data show hedge fund assets administered there fell from $86 billion in June 2008 to under $70 billion a year later. However, the total number of funds actually rose 10 percent to 614. Also, the Lehman/Madoff effect is yet to play out as managers sift through the practicalities of moving funds.

Millennium Global is a Guernsey-based alternative asset manager that may set up several hedge funds on Deutsche Bank's Luxembourg-based funds platform.

"Our systematic macro strategy was packaged offshore and not eligible for many European investors. Now we are moving it to Luxembourg, all Europeans can invest because it is EU-regulated," said Marc Clapasson, a Millennium managing director.