marketing into europe 2016

HFMWEEK
S P E C I A L
R E P O R T
MARKETING INTO
EUROPE 2 0 1 6
LIQUIDITY
Diversification is key
TECHNOLOGY
An increasingly vital factor
OPPORTUNITY
Innovators look to alternative Ucits
FEATURING AQMetrics // Arkk Compliance // Goldman Sachs // Lyxor
// Schroders // Sparkasse Bank Malta
,7·6($6,(5:+(1&+226,1*)520
7+(%(67$/7(51$7,9(8&,76
',6&29(5+('*()81'(;3(576,17+(,55(63(&7,9(675$7(*,(6
Chenavari7
European Long/Short
Credit
Canyon1
Event Driven, Credit
Capricorn2
Long/Short Equity
Emerging Markets
Tiedemann6
Merger Arbitrage
Och-Ziff5
Long/Short Equity US
Special Situations
Winton3
CTA Diversified
Lyxor4
CTA
PIONEER IN
FUND SELECTION
SINCE 1998
ONE OF THE FASTEST
GROWING PLATFORM UCITS
WITH MORE THAN $2BN AUM*
BEST ALTERNATIVE MANAGERS
IN RISK-CONTROLLED UCITS
FORMAT
Visit lyxor.com or contact solutions@lyxor.com
Lyxor’s Alternative UCITS Platform is the result of more than 18 years of analyzing and selecting the best hedge funds in the industry, taking into
account the pedigree of the manager, the performance engines, the operational structure and the risk monitoring process.
1
Canyon Capital Advisors LLC, 2 Capricorn Capital Partners UK Limited, 3 Winton Capital Management Limited, 4 Lyxor Asset Management, 5 Och-Ziff Capital Managment Group LLC, 6 Tiedemann Investment Group
Advisors LLC, 7 Chenavari Investment Managers.
THE POWER TO PERFORM
ETFs & INDEXING
•
ACTIVE INVESTMENT STRATEGIES
•
INVESTMENT PARTNERS
*Source: TOP 10 UCITS Platform by HFM Week (Jan. 2016); Figures as of December 31st, 2015.
THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT DIRECTED AT RETAIL CLIENTS. Not all advisory or management services are
available in all jurisdictions due to regulatory restrictions. None of the hedge fund experts mentioned herein (“HF”) take any responsibility for the accuracy or completeness of the contents of this document any representations made
herein, or for the financial performance of their own strategies. Lyxor Asset Management (Lyxor AM) and each HF disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profits,
incurred by you or by any third party that may arise from any reliance on this document. Each HF is neither responsible for or involved in the marketing, distribution or sales of the Fund nor for compliance with any marketing or
promotion laws, rules, or regulations; and no third party is authorised to make any statement about any of the relevant HF’s respective products or services in connection with any such marketing or sales. Lyxor Asset Management,
Société par actions simplifiée, having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorised and regulated by the Autorité des marchés financiers (AMF).
This communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorised by the Financial Conduct Authority in the UK under Registration Number 435658.
MARKETING INTO EUROPE 2016
INTRODUCTION
S
imply put, marketing a fund in Europe is
anything but straightforward. Reporting
obligations and the increasing availability
and scrutiny of the disclosure of data
dissuade managers from the space, while
Ucits and AIFMD continue to play
integral parts in any ultimate decision.
Technology remains central to the
process. The incoming Mifid II and its requirement for a substantial
increase in transparency highlights the need for technological
solutions. Partnering with third-party vendors could become a
necessity, and, for the innovative asset manager, digital technology
presents a competitive edge.
Despite misconceptions, liquid alternative strategies are an
opportunity. A broad range of traditional hedge fund investors
are turning to liquid alternatives in a search for diversification to
withstand a variety of market conditions.
The industry-leading figures who have contributed to this
HFMWeek Marketing into Europe Report 2016 investigate the
importance of understanding the devil in the detail. This report
seeks to provide a thorough and insightful examination of critical
legislation and regulation.
Tom Simpson
Report editor
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H F M W E E K . CO M 3
CONTENTS
MARKETING INTO EUROPE 2016
05
INVESTMENT BANKING
AN EVER-GROWING INDUSTRY
Neha Jain and Laura Elliott of Goldman Sachs talk to HFMWeek
about the challenges of marketing an alternatives fund to European
investors and how the offering at Goldman Sachs has evolved in
that context
08
16
INSIDE LIQUID ALTERNATIVES
Andrew Dreaneen, head of Schroder GAIA Product and Business
Development, examines the benefits of liquid alternatives
4 H F M W E E K . CO M
TECHNOLOGY IS THE KEY TO SUCCESS
FUND SERVICES
KNOWING ALTERNATIVE UCITS
Daniele Spada, of Lyxor, speaks to HFMWeek about the alternative
Ucits market and what vital trends will have the most impact to its
development
A CHANGING MALTA
LIQUID ALTERNATIVES
TECHNOLOGY
Kieron O’Brien, of AQMetrics, explains the increasing importance of
technology when marketing a fund into Europe
REGULATION
Danièle Cop of Sparkasse Bank Malta discusses the implementation
of Ucits V and the amendments to the rules governing custodians
in Malta
11
14
19
REPORTING OBLIGATIONS
MEETING REPORTING OBLIGATIONS
Nick Baldwin, director at Arkk Compliance, highlights the
importance of meeting reporting obligations and the potential
consequences for those who don’t
MARKETING INTO EUROPE 2016
INVESTMENT B ANKING
AN EVER-GROWING
INDUSTRY
NEHA JAIN AND LAURA ELLIOTT OF GOLDMAN SACHS TALK TO HFMWEEK ABOUT THE CHALLENGES OF MARKETING AN
ALTERNATIVES FUND TO EUROPEAN INVESTORS AND HOW THE OFFERING AT GOLDMAN SACHS HAS EVOLVED IN THAT CONTEXT
Neha Jain is an executive
director in Goldman Sachs’
Global Fund Solutions
business, and is responsible
for distribution of all fundrelated content into Europe
and Asia. She focuses on
liquid alternatives including
hedge fund content and
internal rules-based strategies
sold to both institutional
and private client asset
pools. Neha joined Goldman
Sachs in 2010, and has
been involved in a variety of
distribution oriented roles for
over a decade.
HFMWeek (HFM): What are the challenges in marketing an alternative fund to European investors?
Neha Jain (NJ): While alternative assets in Europe are
growing twice as fast as the broader hedge fund industry since 2008, post-crisis regulatory changes have significantly altered the marketing of these alternative funds.
Depending on the asset class, liquidity profile and types of instruments traded, a fund can be marketed as a registered Ucits fund,
non-registered Ucits fund, a European AIF or a non-EU AIF.
Each of these regulatory wrappers come with additional service
providers, governance structures
and risk management requirements.
Ucits funds require a custody arrangement, and short exposures to
be taken via swap, hence counterparty arrangements are important
to understand and set-up correctly.
Under AIFMD for instance, safekeeping, cash management and oversight have come to the
fore, which necessitates the appointment of a depository.
The picture is further impacted by the demand-supply dynamic, which can differ dramatically depending on the jurisdiction and the client type within Europe.
Laura Elliott (LE): Our hedge fund clients have been
keen to participate in this growth story and gather assets
from Europe. In many cases they are looking for a partner
who can manage the launch process for a regulated fund,
and assist them in asset-raising. We view our platform as a
collaboration with our hedge fund clients and hence give
the manager control over the brand
and growth of the fund, while offering template documentations
and functioning fund structure
which enables quicker time to
market. On the distribution side,
our key focus is generating direct,
strong, long-term relationships between the manager and underlying
investors.
WE HAVE ASPIRED TO
BE A BEST-IN-CLASS
PROVIDER OF ALTERNATIVE
SOLUTIONS, SINCE OUR
INCEPTION IN 2004
HFM: How has your alternatives
offering evolved in response to
the changing regulatory landscape in Europe?
NJ: We have aspired to be a bestin-class provider of alternative solutions, since our inception in 2004. This was in response to our clients demanding high-quality, cost-efficient investments implemented
in transparent, liquid and appropriately regulated wrappers. The platform has evolved significantly over the last
”
H F M W E E K . CO M 5
INVESTMENT B ANKING
MARKETING INTO EUROPE 2016
LE: Furthermore, as AIFMD begins to take hold across
Europe, we are seeing managers of illiquid assets struggling with cross-border distribution issues in Europe. We
expect a greater proportion of US and Asian hedge fund,
private equity/debt managers to shift towards launching
AIFMD-compliant vehicles to tap this investor base. Having provided an AIFMD compliant solution to our existing
investors, we are familiar with the various service providers and requirements around governance, reporting and
cross-border distribution of these funds.
decade and currently offers a broad spectrum of investable
products ranging from internally developed rule based
strategies and external hedge fund content offered in multiple formats; Ucits, AIFMD compliant SIFs and QAIFs
and Cayman funds.
LE: Our aim is to build a broad, cross-asset alternatives platform that allows access to hedge fund managers, systematic
strategies, managed risk premia and other illiquid alternative
investments in a transparent, liquid and cost-efficient format. We believe that by having a broad and flexible product
range we can create the right mix of investment opportunities to meet the diverse needs of the clients that we service.
As the race for returns intensified, we are cognisant of the
ever-changing regulatory landscape and pressure on costs
and fees. Our key focus is efficient implementation, varied
access and targeted cross-border distribution.
HFM: How has investor interaction informed your response to these regulatory changes?
NJ: Our approach to investors in the alternatives market
is solution-driven. We are looking to investors for guidance on what they would like to see in a regulated format
and work towards creating products that fit client portfolios. We believe that the sustained success of the platform
will be driven by the quality of the products we offer: the
calibre of the hedge fund managers we can attract, and the
merit of our systematic strategies. This is where we aim to
differentiate ourselves.
Entering the Ucits market in 2007 was a natural evolution of our offering, and in line with our long-term vision
for the alternative investment market. Our early Ucits
products were entirely systematic (i.e. rule-based) as our
clients looked to capture risk premia across asset classes
in a transparent and low-cost implementation. More recently, we are developing a range of externally managed
risk premia strategies in the Ucits wrapper, as clients are
seeking increasing fiduciary oversight in the kind of products they choose to invest in.
6 H F M W E E K . CO M
Laura Elliott is an
executive director in
Goldman Sachs’ Global
Fund Solutions business
and is responsible for
the development and
management of the Ucits
HF platform, which includes
product strategy, manager
selection and due diligence.
Prior to this, she was
responsible for managing
the third-party manager
platform, across onshore
(Ucits) and offshore funds.
She joined Goldman Sachs
in 2004 and has over 10
years of experience in a
variety of roles within the
hedge fund industry.
HFM: What key industry trends will be of the most
significance to the process of marketing an alternative
fund to Europe over the next 24 months?
LE: Propelled by regulatory requirements and a rising demand for liquid alternatives, we believe that the industry is
at the threshold of expansion – across styles, geographies
and investor types. We are increasingly seeing more US
and Asian managers asking about Ucits. While this market
has been dominated by equity long/short strategies so far,
we expect to see strategies such as discretionary macro and
credit enter the Ucits market in the next year.
We believe that AIFMD and Ucits are complementary
brands, which have the ability to co-exist in the European
marketplace, as they serve different needs. The AIFMD
offering is likely to lean much more towards classic alternatives products – less liquid hedge funds, private equity/
credit, and real estate funds, while the Ucits offering will
grow to accommodate liquid strategies from alternative
and traditional asset classes.
NJ: We are also seeing many more of institutional investors
gravitating towards investing in a regulated format and we
expect this trend to continue over the coming years. With
changes in regulations for distributors across Europe, we
expect a renewed focus on Ucits funds from this client base
as well. We think that Ucits is well-poised to be a bigger and
more credible brand for liquid alternatives, as more quality
managers and diversified strategies enter this space. Q
T R U S T E D
H E R I T A G E
A D V A N C E D
T H I N K I N G
Access our growing
virtuoso range
In today’s volatile times, building
robust, diversified portfolios is as
important as ever.
Schroder GAIA offers investors access to leading
hedge fund managers from around the world
within a UCITS framework. Our suite of funds
spans a diverse range of asset classes and
strategies, including:
– Equity & credit long/short
– Trend-following
– Event-driven
– Catastrophe bonds
With $6bn* already invested, our specialist
in-house manager solutions team is constantly
on the hunt for the most compelling hedge
fund strategies.
To find out more, visit www.schroders.com/gaia
Important information. For professional investors or advisers only. *Source: Schroders, as at 31 December 2015. Past performance is not a reliable indicator of future results, prices of shares
and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued in April 2016 by Schroder Investment Management Limited, 31 Gresham
Street, London EC2V 7QA. Registered number 1893220 England. Authorised and regulated by the Financial Conduct Authority. w48833
MARKETING INTO EUROPE 2016
A CHANGING MALTA
DANIÈLE COP OF SPARKASSE BANK MALTA DISCUSSES THE IMPLEMENTATION OF UCITS V AND THE AMENDMENTS TO
THE RULES GOVERNING CUSTODIANS IN MALTA
U
Danièle Cop is head
of legal at Sparkasse
Bank Malta, a Maltese
bank which specialises
in wealth management,
private banking and custody
services for collective
investment schemes.
8 H F M W E E K . CO M
cits V (Directive 2014/91/EU, amending the Ucits Directive 2009/65/EC)
must have been one of the items high on
the 2016 agenda of the regulator, professional advisors, managers and custodians of Ucits in Malta, probably among a
number of other acronyms such as CRS, MAD II/MAR,
SFTR, etc. The transition is in full swing now that Ucits
V has been transposed into Maltese law through a new set
of regulations governing custodians and changes to the
Investment Services Rules issued by the Malta Financial
Services Authority have been made. As usual with the implementation of EU law, there seem to be more questions
than answers as work on Ucits V compliance progresses.
UCITS V – THE DEVILISH DETAILS
One of the objectives of Ucits V was to align the provisions
regarding depositaries of Ucits with those of AIFMD. At
first glance, the new depositary rules for Ucits appear
quite similar to those of AIFMD, but there are a number
of important differences. One of the most obvious departures from AIFMD is that the depositary of a Ucits cannot transfer the liability for loss of financial instruments
to the sub-custodian. However, some of the divergences
are less obvious and may lie in subtle variances in wording. To use the same example of the depositary’s liability:
while AIFMD states that the depositary is liable to the AIF
or to the investors of the AIF, Ucits V stipulates that the
depositary is liable to the Ucits, and to the unit-holders of
the Ucits, for the loss or financial instruments and other
losses resulting from the depositary’s negligent or intentional failure to properly fulfil its obligations under the
Directive. This seems to have been a deliberate decision of
the EU legislator, since it is indicated that every investor
in a Ucits should be able to invoke claims relating to the
liability of the depositary directly or indirectly through the
management company or the Ucits. This is irrespective of
the legal form of the Ucits (corporate or contractual) or
the legal nature of the relationship between the depositary,
the management company and the unit-holders, but the
right of unit-holders to invoke depositary liability should
not lead to a duplication of redress or to unequal treatment
of the unit-holders.
While the AIFM is ultimately responsible for compliance with AIFMD rules, it is the Ucits (if it takes the form
of an investment company), which is subject to the obligations regarding depositaries under the Ucits Directive.
Possibly, this might explain why certain provisions of the
AIFMD concerning AIFMs were not replicated in Ucits
V for management companies, such as, for instance, the
detailed rules on valuation policies and procedures. Nevertheless, valuation is a function of portfolio management
and the depositary still has to verify that valuation policies and procedures are established, implemented and
reviewed.
Also, notable for their absence are rules regarding prime
brokers in Ucits V. The depositary rules of AIFMD forced
a fundamental re-thinking of the relationship between the
fund, the depositary and the prime broker. This will naturally also be the case for Ucits, even more so as Ucits V is
more prescriptive than AIFMD when it comes to the “reuse” of assets. In fact, the “reuse” of assets by the depositary
or a sub-custodian (which could be an entity providing
prime brokerage services) for own account is prohibited,
and subject to strict conditions if assets are “reused” for the
account of the Ucits. The term “reuse” is widely defined as
comprising any transaction of assets held in custody including, but not limited to, transferring, pledging, selling
and lending.
Furthermore, the due diligence requirements in respect
of delegates (and sub-delegates) under Ucits V go beyond
those applicable under AIFMD. For example, if the depositary appoints a delegate for the performance of safekeeping functions outside the EEA, it has to obtain independent legal advice on the enforceability of the contractual
arrangement with the delegate under the applicable insolvency law and case law of the country where the delegate
is located. Curiously, the term “located” is used instead
of “established”, which begs the question whether legal
advice is required when the depositary deals with a third
country branch of an EEA institution or an EEA branch of
a third country institution, with the added complication
that the insolvency laws of both the country of the branch
and the head office could be triggered.
On the point of delegation, it is worth noting that Ucits
V replicates the segregation obligation which was initially
adopted under the AIFMD and echoes the unfortunate
use of the expression “mutatis mutandis” in rendering provisions related to delegation and segregation applicable to
sub-delegation. In the meantime, the industry is still awaiting Esma’s guidance on asset segregation under AIFMD,
following a consultation launched back in December 2014.
Whatever the outcome may be, the interpretational issues,
operational difficulties and risks of opening and maintaining separate omnibus accounts for AIFs, Ucits and other
types of clients for depositaries and their delegates are very
real and it remains difficult to see how the segregation requirements are reasonably justified to achieve their aim:
investor protection.
THE ELUSIVE “TRANSITIONAL ARRANGEMENTS”
In its Q&A on Ucits, Esma indicated rather simplistically
that, while Ucits depositary contracts should be revised
promptly in accordance with any transitional arrangements
R E G U L AT I O N
outlined in the delegated acts, the provisions of a
contract which set out the parties’ agreement on
depositary liability, and which conflict with the
Ucits V depositary liability provisions, will be void
with effect from 18 March 2016 and the Ucits V
depositary liability provisions will apply instead.
This seems odd, considering that the Level 2 delegated regulation detailing the depositary obligations will only apply from 13 October 2016, and
does not seem to set out any transitional arrangements.
From the Ucits’ perspective, KIIDs and prospectuses will need to be updated in due course. Fairly
detailed information concerning the depositary
will need to be given in the prospectus, including a
description of any safekeeping functions delegated
by the depositary, the list of delegates and sub-delegates and any conflicts of interest that may arise
from such a delegation, and a statement to the effect that up-to-date information on this point will
be made available to investors on request. Esma
has indicated that the Ucits will be allowed to add
the relevant information to the prospectus at the
next occasion it is revised for another purpose or in any
event by 18 March 2017 at the latest.
regulations was published at the beginning of April
2016, the Investment Services Act (Custodians
of Collective Investment Scheme) Regulations,
which concern all custodians of collective investment schemes and contain specific provisions that
apply depending on the type of fund serviced by
the custodian.
Understandably, the Maltese rules and regulations for the implementation of AIFMD and Ucits
V do not address the interpretation issues posed by
these Directives, some of which have been mentioned above. But it must be said that the Maltese
legislator and the MFSA took the opportunity to
clarify and improve some of the local rules regarding the holding and control of assets by custodians
of collective investment schemes. For instance, the
regulations include new provisions on the consequences of termination of the depositary or custody agreement, which seek to offer a solution to
situations of deadlock, when the agreement is terminated but the fund’s assets cannot be transferred
or no succeeding custodian is appointed.
While many unanswered questions continue
to surround EU law related to depositaries, and national
competent authorities such at the MFSA become increasingly dependent on guidance from Esma and the European Commission, one thing is certain: legal and compliance staff, practitioners and industry associations of funds
and their service providers have their work cut out to find
workable solutions in line with the exceedingly detailed
and complex body of rules promulgated at national and
EU level. Q
NOTABLE FOR THEIR
ABSENCE ARE RULES
REGARDING PRIME
BROKERS, AIFMD FORCED
A FUNDAMENTAL
RE-THINKING OF THE
RELATIONSHIP BETWEEN
THE FUND, THE DEPOSITARY
AND THE PRIME BROKER
REGULATION OF CUSTODIANS IN MALTA
In Malta, custodians of collective investment schemes are
licensed and regulated by the MFSA under the Investment
Services Act. The provisions of Ucits V were transposed
into Maltese subsidiary legislation, sticking to the wording used in the Directive quite faithfully. A new set of
”
H F M W E E K . CO M 9
MARKETING INTO EUROPE 2016
INSIDE LIQUID
ALTERNATIVES
ANDREW DREANEEN, HEAD OF SCHRODER GAIA PRODUCT AND BUSINESS
DEVELOPMENT, EXAMINES THE BENEFITS OF LIQUID ALTERNATIVES
Andrew Dreaneen
is head of Schroder GAIA
Product and Business
Development and
responsible for business
development of the
Schroder GAIA hedge fund
platform. Previously, Andrew
was head of Product
Development for a number
of Schroders Ucits and
alternative fund ranges.
His career commenced
in 1998 in New Zealand
in alternative investment
boutique, FMG.
HFMWeek (HFM): What is the main role of liquid
alternatives within investors’ portfolios?
Andrew Dreaneen (AD): Since liquid alternatives
can cover a broad range of strategies and asset classes,
the role they play can depend on how you define them.
For example, broader definitions of liquid alternatives
may include 130-30 funds, even though they aren’t really hedge fund strategies as such, while others may only
include strategies more familiar to offshore hedge fund
investors, such as long/short or absolute return. But, ultimately, it boils down to a fundamental thinking of the
balance between risk and return. Offering diversified return streams, reduced volatility and decorrelation characteristics, investors are recognising the value of blending liquid alternatives within a balanced portfolio, with
the aim of enhancing risk-adjusted returns.
Interestingly, although liquid alternatives, in large
part, tend to cater for the retail investor market, we are
now seeing growing interest from traditional hedge fund
investors and institutional investors, provided that the
liquid version’s underlying strategy is consistent with
the offshore parent strategy. We are seeing a lot of institutional investors look at the Ucits version and in some
cases, the Ucits version has proved an attractive proposition as they can be much larger than the offshore version.
If an institutional investor wants to write out a $100m or
$200m ticket, they may often prefer to be in a $2bn fund
rather than a $300m fund. So, the market is evolving and
it’s playing into all types of investors today.
HFM: What do liquid alternatives offer in the current market environment?
AD: Given heightened volatility, low interest rates and
elevated equity market valuations, we are seeing that a
broad range of investors are turning to liquid alternatives
in search of genuine diversification and the ability to mitigate the impact of large market corrections.
If we look at the S&P 500, for example, from 2009 to
2010 and 2012 to 2014, these periods saw roughly 75%
to 91% of stocks in the S&P 500 go up. Those were great
years to be in the market, but last year we saw a big reversal with only 45% of stocks higher. In January and
February of this year, we had a very large number of
stocks down and we still see little sign of a stable macroeconomic environment materialising.
Given this uncertainty, investors are recognising the
need to avoid playing the beta game and are looking
to alternative strategies to help build a well-diversified
portfolio that is able to withstand a variety of market
conditions.
H F M W E E K . C O M 11
L I Q U I D A LT E R N AT I V E S
HFM: What areas of liquid alternatives have seen
growth in recent years? What are the reasons for
this?
AD: As I’ve mentioned, the period between 2009 and
2014 were, for the most part, particularly bullish years.
So liquid alternative strategies that were more highly
correlated to the market or more directional in nature,
such as long-biased equity or 130-30 strategies, proved
particularly popular. These strategies looked to maximise
participation in rising markets, providing a more equitytype return with perhaps less volatility.
However, given the current environment we have
seen a shift in demand to more low-net, less directional
strategies that don’t seek to provide a high beta or follow
broader market directions. These types of strategies, such as market-neutral or relative value,
aim to generate alpha based on the relative performance of one stock or market against another,
or may even look to benefit from corporate transactions like M&As. These strategies rely on the
individual skill of the manager and their stockpicking ability rather than seeking to play a broad
market rally. This is where we’ve seen growing
demand and particularly when it comes to pricing. Many liquid alternative strategies have fees
comparable to offshore hedge funds, although,
investors are shying away from paying these types
of costs for a strategy that is highly correlated to
the market.
manager skill rather than for a manager who has ridden
the wave of buoyant markets. Since alternative strategies
are expected to derive a large component of, often promised, additional returns through active management,
manager skill plays a crucial role. Investors should look
for managers with a transparent, repeatable investment
process and a long and proven track record of delivering
consistent alpha across a variety of market conditions. A
proven edge is vital.
HFM: What is Schroders’ experience in managing
liquid alternatives?
AD: At Schroders, we manage a broad range of liquid
alternative strategies across a variety of different asset
classes, while our global Ucits platform, Schroder
GAIA, provides investors with access to leading,
externally-managed hedge funds, such as equity
and credit long/short, event-driven, trend-following and catastrophe bonds. We’ve also recently extended this platform into the non-Ucits
arena, through Schroder GAIA II. In doing so, we
are able to offer investors a more diverse suite of
liquid alternative strategies, some of which may
not naturally fit within the Ucits format and are
most effective outside of such a framework. For
example, we recently launched a distressed securities strategy on the platform.
I’ve mentioned the importance of investors understanding exactly what they’re buying when it
comes to alternatives and it’s no different for us.
Manager selection is critical and at Schroders we are extremely vigilant with the managers we partner with and
conduct deep due diligence. Only through this process
are we able to find the most compelling strategies for our
clients that can help them build robust portfolios fit to
withstand a range of different market environments. Q
THE MARKET IS
EVOLVING AND IT’S
PLAYING INTO ALL TYPES
OF INVESTORS TODAY
HFM: Are there any misconceptions of liquid alternatives?
AD: It’s often misconstrued that hedge fund strategies
offered in a mutual fund format are designed to perform
well in all environments. However, it’s important to
understand that certain alternative strategies are more
directional or seek to participate in rising markets and
therefore go up when markets go up. On the flipside, this
infers that they will also fall when markets fall, demonstrating a moderate to high correlation to the market. So
investors should understand that liquid alternatives are
not a homogenous asset class. Within long/short equity,
for example, strategies such as long-biased, short-biased
or market-neutral can have very different risk/return profiles. Similarly, the return expectations between a quantitative and fundamental approach can also differ greatly.
Furthermore, investors shouldn’t automatically assume that the liquid version reflects the same as the offshore parent strategy. In some cases managers may create
a strategy that is differentiated from the offshore version.
Therefore you shouldn’t necessarily rely on the offshore
strategy’s track record as a basis of how the liquid version
may perform. Investors should analyse the offering carefully and understand what to expect from the strategy in
different market environments.
I mentioned earlier that liquid alternative strategies
can have fees comparable to offshore hedge funds. Investors should be mindful that they’re paying for genuine
1 2 H F M W E E K . CO M
”
Important Information: The views and opinions contained
herein are those of Andrew Dreaneen, and may not necessarily
represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to
be for information purposes only and it is not intended as promotional material in any respect. The material is not intended
as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and
should not be relied on for, accounting, legal or tax advice, or
investment recommendations. Information herein is believed
to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors
of fact or opinion. Reliance should not be placed on the views
and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income
from them may fall as well as rise and investors may not get back
the amount originally invested. Issued by Schroder Investment
Management Limited, 31, Gresham Street, EC2V 7QA, who is
authorised and regulated by the Financial Conduct Authority.
For your security, communications may be taped or monitored.
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MARKETING INTO EUROPE 2016
TECHNOLOGY IS
THE KEY TO SUCCESS
KIERON O’BRIEN, OF AQMETRICS, EXPLAINS THE INCREASING IMPORTANCE OF TECHNOLOGY WHEN MARKETING A
FUND INTO EUROPE
Kieron O’Brien has
spent almost 20 years
in the financial markets.
Prior to joining AQMetrics,
he worked on market
surveillance, data analytics
and IR services projects at a
leading European Exchange
and ran the sales effort for
an Irish and Canadian cloud
and business intelligence
boutique. Before his
venture in RegTech, he
was managing director of
Rosenblatt Securities in
Europe. During his tenure,
he was responsible for
developing the Rosenblatt in
Europe where he consulted
with money managers on
topics including market
structure, technology
solutions and strategic
trading assessments.
14 H F M W E E K . CO M
HFMWeek (HFM): How significant is technology
to a fund manager looking to market into Europe?
What areas are key?
Kieron O’Brien (KO): At AQMetrics, we believe that
technology plays a critical role for fund managers looking
to market into Europe in the future. Risk management is
a key area in technological advancement. In the Ucits
world, whether you are running VaR on a Ucits fund or
screening for investment breaches pre-trade, it is only
through the systematic approach with technology that
you can be sure they know their risk and are compliant.
In regards to AIFMD, technology is the key to ensuring
that each nuance particular to individual jurisdictions is
understood and applied at filing time. Furthermore, with
Mifid II on the horizon, the specific requirements to each European country’s regulator can really only be effectively met through
the use of technology.
Furthermore, complying with Mifid II legislation
will require a significant level of new streams of data to
be produced in a variety of different reports to different
agencies and/or divisions of such agencies. It goes without saying, technology is the only means to mitigate the
risk of duplication of effort by asset managers and in turn
reduce the human capital costs.
In addition to specific country and product-based regulations, funds marketing into Europe also need to be mindful of the cyber-security and data security laws in Europe.
HFM: Does technology hinder or aid funds looking
to market into Europe? How?
KO: Without technology, European regulatory reporting becomes a mammoth task.
For example, for the many alternative funds operating across various countries and jurisdictions in
Europe, these funds may have up
to 40 different reports to file on
a quarterly basis, as compared to
those domiciled in the US, where
reports are consistent across states
and therefore not differentiated.
Moreover, technology creates
efficiencies, which, in turn, create
better profit margins, thus making
funds more attractive to investors.
Technology aids funds to stand
out from the crowd in Europe. We
all know that investors, both retail
and institutional are more risk savvy than ever before and
the funds that can show robo-advisory, robo-risk and
robo-compliance management are those that will attract
the investors in Europe.
WITHOUT TECHNOLOGY,
EUROPEAN REGULATORY
REPORTING BECOMES A
MAMMOTH TASK
HFM: How do technology related regulations impact funds
looking to market into Europe?
KO: The Alternative Investment Fund Managers Directive
(AIFMD), which came into effect
in July 2014 across Europe, is already causing difficulties for asset
managers. For each alternative
fund, asset managers are required
to submit more than 300 data
fields, including the main instruments traded, investment
strategies, markets where a fund traded, and principal exposures and concentrations. Additionally, certain jurisdictions require specific filing procedures, ranging from
file encryption for BaFIN in Germany, to Swedish and
Dutch language versions of the reports for Dutch and
Swedish regulators. It is truly only through technology
that funds marketing in multiple jurisdictions in Europe
can rest assured that they are ready to meet each jurisdictional requirement.
”
HFM: Are there any misconceptions about technology within the industry? Why do these exist?
KO: Technology changes the very nature of asset management transactions; however, this is already occurring
with the dawn of robo-advisors. Although robo-advisors
TECHNOLOGY
cause mistrust among traditional asset managers, it is
proof that technology should not be feared and automation can bring great value in terms of efficiencies.
Asset management has historically been a very handson industry built on a foundation of relationships, networks and trust. Many firms have been cautious about
investment in technology solutions because of cost and
the uncertainty of future proofing any investment – the
knock on effect is inevitable, i.e. vendors such as AQMetrics will find ways of alleviating these fears by offering ondemand pay as you go options, which ensure tight cost
management and deliver future proofing through the
very nature of their highly interactive, more transparent
and low cost upfront investment models.
Technology complexity and cost are misconceptions
within the industry. For years, consultants and specialists
have been creating a myth of complexity around the delivery of software into the industry. We recognised this at
AQMetrics on day one and decided to simplify the technology offerings to the industry by creating a one-stop
shop that offers simple, effective and efficient software as
a service, thus lessening the need for costly consultants
and experts.
HFM: Are many funds technology dependent, do
they have a choice?
KO: Funds are not technology dependent; technology is
the new norm for funds. Funds don’t have a choice. With
the emergency of robo-advisors, robo-risk and robocompliance, the firms that don’t embrace technology will
be facing a challenge to thrive in the future.
HFM: What key industry trends will be of the most
importance to funds marketing in Europe within the
next 18 months?
KO: Mifid II and the requirement for transparency
leads to the greater need for technology solutions and
a greater dependency on third-party data vendors. This
will lead to a trend towards collaboration. Innovative asset managers partnering with software vendors to build
digital capabilities into an existing platform, will gain
an advantage over those that are not. For asset managers, digital technology is a competitive advantage to win
market share across the various countries in Europe. It is
simply not feasible to know your risk and always be compliant across Europe without embracing digital technology. The European regulatory nuances across countries
means that computer-driven solutions using algorithmic
risk assessments and automatic compliance reporting
according to jurisdictions will continue to be one of the
most important industry trends for funds marketing in
Europe. Q
H F M W E E K . C O M 15
MARKETING INTO EUROPE 2016
KNOWING
ALTERNATIVE
UCITS
16 H F M W E E K . CO M
FUND SERVICES
DANIELE SPADA, OF LYXOR, SPEAKS TO HFMWEEK ABOUT THE ALTERNATIVE
UCITS MARKET AND WHAT VITAL TRENDS WILL HAVE THE MOST IMPACT TO
ITS DEVELOPMENT
HFMWeek (HFM): Can you provide a general
update on the alternative Ucits industry?
Daniele Spada (DS): Firstly, and most importantly,
there is a strong demand and an even stronger appetite for alternative Ucits. In terms of evidence, recent
figures released by Morningstar highlight the success
which the last two years have borne witness to and emphasises asset growth.
This year, despite a rather slow beginning, the figures suggest that an emerging positive trend looks set
to continue. January and February of 2016 saw
a relatively low number of inflows, but March
certainly shook off any New Year fragilities
and volatility. Initially, during this low ebb, investors were simply wondering what the next
step would be and were retaining the level of
cash before deciding what kind of investment
to make in the volatile markets. With more
than €3.5bn of assets in the Ucits space, March
serves as confirmation that a strong interest for
alternative Ucits remains. A change in investor attitude has birthed a hunt for Ucits alternatives that offer more volatility control and
greater risk management.
At Lyxor, in terms of growth, we are in line
with the industry, and in some respects, see
even more. Take our Ucits platform for example, there was a growth rate in AuMs in 2015 that
was slightly higher than the industry, which grew by
roughly 30%. And, in terms of assets under management, we have now reached $2bn overall with our
eight funds in the Ucits range.
The proof is evident and it is clear that a strong demand remains. In regards of the future, a correlation
between our statistics and industry-wide figures indicate that the trend exists, and we expect it to continue.
these type of funds are already validated and there is
no requirement to gain specific internal approval to
invest in alternative Ucits. This success explains why
more and more hedge fund managers want to propose their strategies in a Ucits format, directly or via
a platform like Lyxor. Recognisability is the key in the
acceptance of this format by institutions and private
clients.
HFM: How do you see the Ucits industry developing? What key industry trends will be of the most
significance?
DS: Firstly, I believe that the industry is developing
rather impressively. This is mainly due to the current
market context and given the fact that, on the equity
side, valuations are rich in the majority of the equity
markets and that the current volatile market can last
for a while.
In regards to fixed income, it is supremely
difficult to anticipate that further profit can
be made. Any decision maker will have to look
beyond the standard long-only investments. Inevitably, there will be an increasing need for alternative sources of return and a search for less
correlated and alpha-driven investments. And,
for those who will be conducting this search,
alternative Ucits will be the solution. Alternative Ucits is here to stay and we envisage it to
remain for the foreseeable future.
At Lyxor, we scour the globe for talented
managers with true “hedge fund” skills and
spend a significant amount of internal resources to propose strategies that are underrepresented in the Ucits universe. We propose strategies and managers that are aligned with the
current market context. The vast majority of meetings
that we conduct with investors surround a small number of simple questions; i) how can I replace (usually
partially) my long-only exposure in Europe or in the
global equity markets with a long/short equity fund
or ii) do you have specific long/short equity market
neutral funds. There is a constant pursuit of talented
managers that we would like to provide a platform for.
Our analysts research specific skill sets throughout the
hedge fund world and to date, we have a couple of advanced discussions that should enable us to welcome
at least two additional managers by the end of the year.
Investors are looking for strategies with less directionality, different sources of alpha, less volatile returns,
all packaged in a regulated, transparent and risk controlled framework, the Ucits format.
In terms of remaining a market-leader, we pride ourselves on our history. Lyxor is widely acknowledged
in uncovering talented managers in the offshore world
and proposing them through transparent and risk
controlled managed accounts. Behind the scenes, our
powerful group of engineers and solution providers
are able to convert hedge fund strategies, even some
complex and innovative ones, into a Ucits format.
From time to time, it is important to innovate in appeal to the masses, who, above all else, may just want
to see something a little different. Q
THERE IS A VAST AMOUNT
OF ATTENTION PLACED ON
TRUE ALTERNATIVES TO
LONG-ONLY INVESTMENTS
HFM: The Ucits format was not created entirely
for hedge funds and is more appropriate for less
sophisticated investors. How do you explain such
appetite for Ucits hedge funds when taking this
into consideration?
DS: Primarily, Ucits is not a regulation comprised
only for hedge fund investments. Ucits and alternative Ucits have, and answer to, the same regulation. So,
why are we experiencing such a big success?
The answer happens to be contained within the
question. Investors are searching for true alternatives,
but in a form which is both well-known and wellrespected by their boards, risk managers and clients
alike. Thus, proposing an “alternative” way of investing in the same asset classes than the Ucits long-only
funds, but following the same regulation, is hugely
reassuring for them. Moreover, this regulation and
”
Daniele Spada
is head of managed
account platform at Lyxor,
where he is in charge of
the development and
management of the
platform, including hedge
fund and mutual fund
selection, due diligence, and
customised infrastructure
services. He joined Lyxor
in 2007, is a director of a
number of investment funds
managed by Lyxor and was
appointed to his current
position in 2014.
H F M W E E K . C O M 17
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MARKETING INTO EUROPE 2016
R E P O R T I N G O B L I G AT I O N S
MEETING REPORTING
OBLIGATIONS
NICK BALDWIN, DIRECTOR AT ARKK COMPLIANCE, HIGHLIGHTS THE IMPORTANCE OF MEETING REPORTING OBLIGATIONS
AND THE POTENTIAL CONSEQUENCES FOR THOSE WHO DON’T
Nick Baldwin is a
director at Arkk Compliance.
Nick started his career
as a Big Four chartered
accountant before joining
Arkk in 2010. He is a
regulatory reporting and
technology expert and
currently leads engagement
teams for Arkk’s AIFMD filing
clients.
HFMWeek (HFM): Are enough fund managers prepared to meet reporting obligations?
Nick Baldwin (NB): So far, our experience in 2016 has
been that few fund managers still struggle to meet their
AIFMD submission deadlines. Filing periods remain
tight and data sourcing can still be challenging – but
these are not the new challenges they were in 2014 when
we first helped filers make their Annex IV returns. Most
compliance teams are used to their reporting cycles by
now.
The most common issues that we encounter these days
concern the quality of reporting. An Annex IV return can
comfortably clear the validation checks of any national
authority gateway and still contain glaring inaccuracies,
inconsistencies and omissions. Towards the end of 2015 we started
to hear of more direct-communications from some regulators concerning accuracy and completeness of AIFMD returns, and in
some cases, requests for resubmissions. HFMWeek revealed back in
January that the UK FCA was investigating 67 AIFMs for regulatory breaches, and in terms of preparedness, it is this increased level
of scrutiny for which fund managers may be less well-prepared.
don’t have large compliance teams and acknowledge
that they would find it difficult to report under multiple
National Private Placement Regimes without outsourcing some of the effort. These are the filers that are most
excited about the proposed extensions of AIFMD passporting to non-EEA financial centres since the relative
compliance cost savings could make quite a difference.
HFM: What will happen to fund managers who do
not meet reporting obligations?
NB: We know that what can happen is very serious indeed. At a supranational level, the Directive spells out
the requirement for member states to impose penalties
on responsible persons and allow public disclosure of
punishments for infractions. At a
national level different regimes are
enshrined in law but the common
message is that ultimately penalties can be very severe.
What managers really want
to know, however, is what the
short-term effects of poor-quality
reporting look like. Competent
authorities are consistent in their
initial approach that it is preferable
to correct and assist filers rather
than hand down punishments. We
have yet to encounter a filer that
has been formally admonished for
AIFMD non-compliance, but we
have helped a number of fund managers make resubmissions of old Annex IV returns at the
request of their regulator. For compliance teams that are
under pressure to maximise efficiency this can be punishment in itself.
To date, the cases we have seen of regulators contacting
filers directly are relatively sporadic, but the trend is that
they are increasingly frequent and broadening in their requests. We are always keen to impress upon managers the
benefits of addressing quality issues as early as possible
– correcting inaccurate or incomplete returns becomes
WHAT MANAGERS
REALLY WANT TO KNOW,
HOWEVER, IS WHAT THE
SHORT-TERM EFFECTS OF
POOR-QUALITY REPORTING
LOOK LIKE
”
HFM: Do reporting obligations deter prospective fund
managers from marketing in Europe? Why?
NB: Cost of compliance will always be a factor when
making the decision to market, but we don’t see a lot of
evidence of the AIFMD transparency obligations being
pivotal in this. Successful fund managers will naturally
think strategy first and most compliance teams are fairly
resilient to new reporting requirements.
The exceptions, as you might expect, are those non-EEA
firms with lower AUMs wishing to market into the Union.
We assist some firms from North America and Asia who
H F M W E E K . C O M 19
MARKETING INTO EUROPE 2016
harder the older they get, and regulators are more likely
to accommodate filers that are pro-active in requesting
revisions.
HFM: How can managers retain ownership of
their reporting while outsourcing to a third-party
provider?
NB: Outsourcing providers have a responsibility to ensure fund managers understand their disclosure and do
not simply sign it off, but finding sufficient time during
filing periods to ensure this always happens can be difficult. The best approach we have found for Annex IV
reporting is to meet with the client during a quieter time
at the start of an engagement and agree on the methodologies and assumptions to be employed in preparation
of the live returns. This also allows time to address any
regulatory knowledge gaps so the individual signing off
the returns understands what they are reviewing.
Something else that we find important is accommodating filer preferences when it comes to making live Annex
IV submissions. The electronic filing stage is where thirdparty specialists can add a lot of value to the reporting
process, but the function needs to be undertaken within
the rules and in a way that suits the filer. This could mean
carrying out filings at the client premises, using shared
online workspaces, or simply talking the filer through the
process over the phone.
HFM: Over the next five years, what current industry reporting-related trends will be of the most
importance to fund managers marketing in Europe?
NB: The most significant trend will be the increased
20 H F M W E E K . CO M
R E P O R T I N G O B L I G AT I O N S
availability and scrutiny of disclosure data. You may say
this could be applied to most spheres of compliance, but
our expectation is for AIFMD filers in particular to see a
very clear upward trend in the level of transparency and
interrogation of reported information over the next two
to three years. We are already seeing the end of the softtouch Annex IV phase in some authorities, and regulators that have invested heavily in electronic infrastructure will feel some pressure to demonstrate value. At a
supranational level, the appetite for greater oversight of
a purportedly light-regulation industry shows little sign
of abating.
In response, we expect to see the continuation of another current trend over the next five years – increased
outsourcing of specific compliance roles to specialist firms.
AIFMD reporting is a very good example of where specialist knowledge, experience and technology can be applied
effectively at key points in a reporting cycle to greatly improve the efficiency of a firm’s compliance function. This
is particularly the case for firms required to comply with
multiple regulatory authorities under National Private
Placement Regimes.
The upward trends in regulation will not be welcomed
by fund managers, but it should be possible to take some
positives from the process of applying greater rigour to
firms’ reporting processes. Many AIFMD filers have sharpened up their data infrastructure in response to the new
requirements, and the Annex IV returns themselves often
make filers look at their fund data from a different perspective. With greater efficiency of reporting and familiarity of the requirements, the next few years of AIFMD
compliance need not be an uphill struggle. Q
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