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Going mainstream
Going mainstream
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Going mainstream

24/06/2016

BNP Paribas Securities Services’ experts discuss the opportunities associated with convergence and the challenges to overcome

HFMWeek (HFM): Are you seeing increasing convergence in the asset management industry?

Ian Lynch (IL): Absolutely. There has been increasing convergence and overlap between different segments of asset management. We have witnessed a growing number of liquid, onshore, long-only UCITS funds launch hedge fund type structures. Simultaneously, some private equity managers are setting up hedge funds or more liquid products and vice versa. The industry is maturing and there are far more multi-asset solutions coming to market.

Páraic Cosgrave (PC): This convergence between long-only, private equity and hedge funds is particularly prolific in Europe, although we have seen similar activity in the US. However, we feel that most of the convergence is happening in Europe among UCITS and alternative investment funds (AIFs). Managers want to offer their clients a broader product suite and setting up different fund structures is a mechanism to achieve this.

HFM: What benefits does this convergence bring managers?

IL: Convergence can enable diversification of revenues through different asset classes and appeal to a wider range of investors. Hedge funds, for example, looking to launch UCITS can acquire retail investors. Having a diverse range of income streams and clients is critical if markets become turbulent and certain clients start withdrawing assets.
In addition to larger firms, we have also seen boutique hedge fund managers move into UCITS to replicate and complement their flagship funds. I certainly envisage this continuing, as routes to market for these managers become increasingly straightforward and cost-efficient with the evolution of service providers. For example, a UCITS manager or AIFM can appoint a management company (Manco) and attain EU distribution benefits at a fraction of the cost of establishing a physical presence.
Furthermore, as hedge funds move into private equity, they tend to attract longer term institutional investors with more permanent capital – given the changed liquidity profile. This can give the manager more flexibility.

PC: Establishing a regulated product in Europe – such as a UCITS or AIF – can help hedge funds attract more capital. Some European pension schemes and insurance companies are not permitted to invest into traditional hedge fund products for a variety of reasons. Having a regulated entity will help win mandates from those investors.
 Managers launching multi-asset products have deployed or tweaked their skill sets to tailor to these changes and differences in these businesses very successfully. We believe convergence is going to continue and that it is only in the early stages.

HFM: What are the challenges that must be overcome when launching new product sets?

IL: One of the biggest, potential issues for fund managers with multi-asset products is that they avoid cannibalisation of their existing flagship fund. There can be a risk that some UCITS products may cannibalise flagship funds as the liquidity of the UCITS will be more generous. However, in many cases UCITS cannot use the exact same strategy as the flagship, so it can be quite difficult to replicate in UCITS form.
Setting up a fund – either a UCITS or AIF – can be costly, and the regulatory barriers to entry are getting far higher. There are also more frequent reporting obligations required of UCITS, given their retail nature. It is crucial fund managers work with service providers who have multi-asset coverage. This can enable a seamless transition from one product set to another. It can also help these firms manage the nuances and different challenges each product set has. This is something that is not always possible when working with a service provider focused on a single asset class.

HFM: What regulatory issues do managers need to be mindful of when they adopt a retail tilt, and how can they best manage this?

IL: Regulated, retail fund products are subject to strict rules. UCITS requires fund managers to appoint a depositary to undertake an oversight role and ensure that the underlying strategy is in line with the fund prospectus. The rules around depositary under UCITS V are more stringent than those contained in the Alternative Investment Fund Managers Directive (AIFMD). UCITS depositaries cannot discharge liability for any loss of assets to sub-custodians whereas AIFM depositaries may do so in limited cases. It is crucial fund managers setting up UCITS have the appropriate systems and technology in place to help ensure compliance with regulation.

PC: AIFMs and UCITS managers must be aware that local regulations in the EU can be different. Some countries take a tougher line, or have additional reporting and registration requirements than others. Certain jurisdictions stipulate that managers must appoint a local agent, or have enhanced tax transparency rules. Fund managers need to ensure they do not breach local rules and routinely check for any changes in legislation in member state countries where they may have investors or are marketing into. This can be achieved by working with providers such as BNP Paribas Securities Services, which have both a global and local presence. We have local experts on the ground, who spend huge swathes of their time reviewing the rules and helping our clients ensure compliance.

HFM: How are providers such as BNP Paribas Securities Services assisting fund managers as they increasingly converge?

IL: BNP Paribas Securities Services works with a diverse array of asset managers – traditional long-only, UCITS, hedge funds, private equity, infrastructure and real estate. Our experience at serving a wide range of clients means we can assist fund managers transitioning into new products effectively using the same technology, infrastructure and staff.
Perhaps the most attractive aspect of our offering is that fund managers exploring new asset classes will face one counterparty. We are an integrated bank offering fund administration, custody and depositary. Regulated European funds need to appoint a depositary under UCITS and AIFMD, and having all of these services available under one roof is attractive. Fund managers are therefore not dealing with multiple service providers and technology systems, which can add cost and complexity to their operational processes at a time when budgets are under strain. Equally critical is balance sheet strength. This obviously is very important to institutional investors and fund managers who take a firm interest in counterparty risk and the creditworthiness of their service providers, particularly under the strict liability regime.

 

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