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AuM in alternative investment funds continue to grow, as investors look for new avenues to identify yields in the current low interest rate environment. “As a fund centre, Luxembourg is second only to the US. Luxembourg continues to lead Europe with a 36% share of AUM by UCITS funds.
Brexit presents huge challenges for UK-based UCITS or AIFMs, who risk being unable to market to EU investors post-Brexit. Potentially devoid of single market access and passporting rights, UK managers of UCITS or AIFs selling to EU investors need to consider how their businesses are structured going forward. The most logical immediate response – given all of the vagueness and ambiguity surrounding any Brexit outcome – would be for fund managers to ensure they retain market access whatever the result. This can be achieved by working with a third party management company, an entity which can legally manage the fund but will delegate portfolio management back to the manager itself. Such ‘Mancos’ are in abundance in Luxembourg, having successfully serviced the UCITS industry for many years, so they are well positioned to help AIFs.
The Alternative Investment Fund Managers Directive (AIFMD) is widely credited with creating an industry-leading regulatory framework for non-UCITS. It is believed AIFMD can create a brand on a par with UCITS, a point made by Camille Thommes, Director General at ALFI. Brexit, however, has had a ripple effect throughout the EU policymaking apparatus and AIFMD is not exempt. The European Securities and Markets Authority (ESMA) has evaluated the regulatory regimes of 12 third countries and given a positive advice on five of them. Some of these markets were told that their regimes were equivalent to AIFMD but passporting will only be realised once approved by the European Commission, the European Council and MEPs.
The introduction of the Reserved Alternative Investment Fund (RAIF) is another complement to Luxembourg’s range of fund structures. The RAIF must be managed by an authorised AIFM that can be located in Luxembourg or in another EU country. The fund itself is not subject to regulatory approval and is indirectly supervised via its manager.
Fintech comes in many guises and its impact will be thoroughly felt in asset management. Automation is being embraced by alternative asset managers as a means by which to streamline regulatory reporting and tired operational processes. “The real estate industry continues to rely on operational processes that are customised and hands-on. It would be good if the industry could automate some of these processes, such as expense authorisation instead of sourcing data from spreadsheets. This would help us make decisions more quickly,” said Michael Fitsum, Director – Head of Operations – at M&G Real Estate in Luxembourg.
Digitisation and automation could also make regulatory reporting more palatable, a process which is renowned for being data heavy. “Digitisation should make it easier for firms to report to regulators, and provide more accurate data,” said Jean-Marc Goy, Counsel for International Affairs at the CSSF.