A regulatory clampdown on hedge funds in the wake of the global financial crisis is threatening the business model of the IFSC by potentially narrowing the range of companies that can supply key services to the alternative investment industry, according to international management consultants PwC.
PwC last week gathered investment managers, fund administrators, regulators and the stock exchange to discuss changes in the industry as well as proposed moves by the European Commission and the Securities and Exchange Commission (SEC) in Washington to bring hedge funds under regulatory control. PwC says this will raise compliance costs and deter funds from operating in Europe.
Brussels wants to limit trustee services to large, highly liquid institutions known as depositaries, while the SEC wants tighter custodial controls to monitor whether assets are actually available to investors and is taking a prosecutorial approach to violators. PwC says the Brussels approach will drive business from Ireland. "It's hard to argue an industry of this size and importance shouldn't be regulated, but the balance has to be on intelligence and we should not limit basic activities," said Mark Casella, PwC partner and practice leader for alternative investments.
Ireland does not boast many fund managers, but it is the largest administrator of hedge funds in the world with 41% of the market, or €689bn in alternative assets serviced here. The activity tends to be book- and record-keeping, transfer agency on behalf of shareholders, redemptions and other related activities.
There could yet be an upside for Ireland however. Hedge funds are anticipating changes in law and using relaxed standards for ordinary retail investments, known as UCITs, to execute hedge fund-type strategies in a less exotic retail wrapping – a development which could wind up creating more business for service providers in the IFSC, many of whom specialise in UCITs. "Politicians are asking asset managers to bring this stuff on-shore to regulated jurisdictions," said Olwyn Alexander, head of PwC's alternative investment practice in Ireland. "Ireland stands to benefit hugely."
The government has already responded to this development with two provisions in the budget. One allows fast-track legislation to implement EU rules on merging funds to create so-called master funds. The other allows for an out-of-the-box legal process to help funds pick up and relocate to Ireland without having to liquidate assets.