Irish Eyes Smile on Growing Fund Industry

Since the birth of the Irish funds industry in 1987, Ireland has come a long way in building the intellectual capital needed to serve a wide range of funds

Today, the nation has more than 11,000 workers providing a range of services to funds, including fund administration, transfer agency, custody, legal, tax and audit.

FGS Partnership is an independent member firm of RSM International, an affiliation of independent accounting and consulting firms, and is registered to carry on audit work by the Institute of Chartered Accountants in Ireland. The following article explores reasons why many hedge fund managers are increasingly choosing Ireland as a domicile for their funds.

With a financial regulatory system that has a reputation for a robust, yet pragmatic approach, a government fully supportive of the industry and a double taxation treaty network, Ireland is well placed to benefit from the changing regulatory requirements and investor demands that followed the financial crisis. Ireland is based onshore in the European Union and offers a variety of EU-regulated products that are attractive to many investors and managers today.

A growing industry

According to May 2010 statistics from the Irish Central Bank, the total assets of Irish domiciled funds is €856 billion, compared to the previous peak of €808 billion in 2007. This marks a major turnaround from just two years ago, when total assets fell to €647 billion in 2008. The assets under administration (AUA) in Ireland, which includes domiciled and non-domiciled funds, have also risen from a low point in the second quarter of 2009 (when AUA was €1,200 billion), to the first quarter of 2010 (when AUA was €1,606 billion).

In fact, Ireland has achieved the largest growth in assets in the first quarter of 2010 of all the major European Fund centers. This flurry of activity has attracted a number of international law firms to enter the Irish market, with major players such as Walkers, Dechert, Eversheds and Simmons & Simmons preparing to open fund practices in Dublin.

A number of international factors, combined with existing experience and expertise in place at the International Financial Services Centre in Dublin, are also contributing to this growth.

The credit crises, combined with issues at a number of high profile hedge funds, have brought the ethical practices of hedge funds center stage. As a result, investors are demanding more from the hedge fund managers to whom they entrust their money, requiring heightened transparency, risk management and compliance reporting.

Industry-watchers believe that difficulties will arise soon for funds looking to attract investors, especially those that refuse to appoint independent administrators and custodians. Third-party administration has been the model employed in Europe for a number of years – and is likely to be the norm for all funds in the near future. As the largest hedge fund administration service center in the world, Ireland is well placed to benefit from the shift.

UCITS III funds

Adopted in 1985, the Undertakings for Collective Investment in Transferable Securities (UCITS) was a set of European Union Directives that allowed collective investment operations to practice freely throughout the EU on the basis of a single authorization from one member state. Today, a growing number of hedge fund managers have begun to provide increased investor transparency by offering UCITS III funds. In 2003, the Product and Management Directives, better known as UCITS III, were transposed into Irish law.

UCITS III permitted UCITS funds authorized under the laws of one EU member state to be sold in other EU member states. Beyond merely allowing collective investment programs to more easily be sold cross-border in the EU, it also introduced a legislative regime throughout the EU, bringing greater transparency and regulation to UCITS III funds, including funds implementing “hedge fund” strategies. Investors benefit from the criteria UCITS III funds impose with respect to diversification, eligible asset classes, leverage and liquidity.

Ireland is a major and growing center for internationally distributed UCITS, with Irish funds distributed in over 60 countries across Europe, the Americas, Asia and the Pacific, the Middle East and Africa. Regulatory uncertainty has also created an opportunity for the more established and regulated fund centers such as Ireland. A growing number of hedge fund managers are hedging their bets by either establishing new UCITS III funds, or considering redomiciling some of their existing funds to Europe from offshore domiciles. For a considerable time, Ireland has been the jurisdiction of choice for the servicing of alternative investment funds, with more than 40 percent of global hedge funds administered in Ireland.

The re-discovering of UCITS III by hedge fund managers has led some commentators to coin the term “newcits,” and concerns have been raised about the non-suitability of the UCITS III wrapper for some investment strategies being accommodated. Clearly, one size does not fit all. Fund products such as the Irish Qualifying Investor Fund, for which investment and borrowing constraints are waived and regulatory approval can be obtained within 24 hours, may be a better fit for some hedge fund managers considering the move onshore.

Ireland’s European Union membership, coupled with the fact that it was included on the OECD’s “white list” of countries that have substantially implemented internationally agreed tax standards, sets it apart from some offshore centers. Some hedge fund managers have already redomiciled funds in Ireland from other traditional offshore centers.

UCITS is a highly successful global brand and UCITS IV is now around the corner. The latest incarnation will streamline the requirements of previous UCITS legislation. Cross-border mergers of UCITS funds, master-feeder structures, simplified and consolidated prospectuses, and improved regulatory cooperation should translate into economies of scale. Ireland stands positioned to benefit greatly as further borders are removed and greater focus comes to the broader marketplace and that marketplace’s service industry.

“According to May 2010 statistics from the Irish Central Bank, the total assets of Irish domiciled funds is €856 billion, compared to the previous peak of €808 billion in 2007. This marks a major turnaround from just two years ago, when total assets fell to €647 billion in 2008....In fact, Ireland has achieved the largest growth in assets in the first quarter of 2010 of all the major European Fund centers. ”

Ireland and the Hedge Fund Industry – At a Glance

• Ireland is the European domicile of choice for cross-border fund distribution. Between 2001 and 2009, Ireland increased its proportion of European cross-border assets by 367 percent, accounting for over 30 percent of the European cross-border market. European cross-border assets grew by 178 percent over the same period. (Source: Lipper FMI, 2010)
• Ireland is a major and growing center for internationally distributed UCITS. UCITS account for 80 percent of Irish domiciled assets and Irish UCITS are distributed in nearly 60 countries around the world. (Sources: Central Bank of Ireland, 2010 and analysis of Lipper data, 2010)
• Ireland is the largest hedge fund administration center in the world. Ireland services alternative investment assets representing approximately 42 percent of global hedge fund assets. (Source: HFM Week Survey, 2010 and IFIA, 2010)
• Ireland is an internationally recognized, open and tax efficient jurisdiction with the lowest headline corporate tax rate in the OECD. Ireland has a 12.5 percent corporate tax and no taxes on funds or investors.
• Ireland has the largest number of stock exchange listed investment funds. With over 3,200 funds and sub-funds listed, the ISE is recognized worldwide as a leading center for listing investment funds. (Source: Irish Stock Exchange, 2010)
• Ireland is a leading European domicile for exchange traded funds. Irish domiciled ETFs represent approximately 30 percent of the total European ETF market. (Source: Blackrock ETF Landscape, 2010)
• Ireland is a leading European domicile for money market funds. Irish domiciled money market funds hold assets in excess of €340 billion. (Source: Central Bank of Ireland, 2010)

Ray Kelly is a director with FGS Partnership’s Audit & Advisory team. FGS is a member of RSM International, a worldwide network of professional services firms.