Fund Managers in Europe

The implementation of MIFID II rules in Europe have caused diverse effects in the asset and fund management industry, both on the purchase side (investors) and on the supply side (fund managers and their services providers).

In this article, I will focus on the changes that have mainly affected the fund managers, the current situation in which they find themselves, and the different alternatives they have in order to continue developing their activity.

With MIFID II, a series of rules have been introduced aiming to increase the transparency and protection of the end investor, this has led to an increase in the costs and requirements for fund managers. On the commissions side, full transparency is required, the investors must be aware of any commission they are paying; on the regulatory side, it is required that all fund managers are regulated to offer their services.

Before MIFID II, fund managers could carry out their activity based on the regulation and technology of their service providers, such as brokers, which used to collect the capital of investors and allow the fund manager to manage their capital through a “ Power of Attorney ”and through management technologies such as MAM accounts.

All this is over, at least in Europe, and the requirement to be regulated to carry out the activity has complicated the lives of many fund managers, especially those of a more modest size.

Managers now face a dilemma, 1) they regulate their activity, either by acquiring a personal regulation or by creating a regulated investment vehicle in Europe, or 2) they transfer their activity to offshore jurisdictions where MIFID II regulations does not rule. These are practically the two options that fund managers in Europe currently have, which I will comment below:

• Move the activity offshore: something that I personally never recommend to my clients as long as they can avoid it. As this can cause various problems along the way. On the one hand, the manager will not be able to legally advertise his services to European citizens, and on the other hand he will be forced to work with “offshore” brokers or service providers, his activity will be less protected and the capital of his clients will be in banks based in “offshore” jurisdictions.
• Regulate the activity: this is the best alternative and the legal formula to continue offering the services of fund management in Europe. Although also, at first glance, the most complicated and expensive.

I constantly meet fund managers who are looking for alternatives to their situation and the most optimal way to get regulated. The option of creating a SICAV or Investment Fund is usually very expensive, especially for small and medium sized managers. Establishment and administration costs, and the maintenance costs of the vehicle, make this option not affordable for many of them at a beginning. However, there is an alternative that, while maintaining all the benefits of operating through an investment fund, significantly reduces the costs of this. This alternative is the creation of a sub-fund through an established fund.

Opening a sub-fund is not an easy task, since it is necessary to find the established fund that is willing to open a compartment under its vehicle and appoint the manager as its administrator, and also, if the activity carried out is Forex (Spot) and CFDs the fund must contemplate such activities in its “prospectus” beforehand.

Once the sub-fund is established and the administrator manager is appointed, it receives regulation automatically and the investment vehicle can be offered throughout all European countries. Likewise, there will be access to European service providers, execution and institutional prices, among many other advantages.

Since I have clients currently working through their own RAIF - SICAV fund in Luxembourg and AIF in Cyprus, there is the option to open a sub-fund through them, obviously after a due diligence process of both the manager and his business. This formula is serving many managers to get regulated, acquire their own investment vehicle, and increase the quality or size of their current business.

If you are currently in this situation, exploring the different options you have to continue your fund management activities in the most optimal way, do not hesitate to contact me directly to discuss this matter further in detail and identify the options that best suit your business.

Cheers,

Eduardo Delgado