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Roundtable: Over 50% of German institutions to put more money into alternatives, offshore funds still attractive

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The growth of alternatives in Germany is accelerating at the moment due to the absence of yield in the typically lower risk assets. While regulated investors’ demand for UCITS is unabated, unregulated investors like corporates, family offices, etc. have found a renewed interest for offshore hedge funds - and funds of funds.

In a recent survey, more than 50% of the institutional German investors said that in 2014 they would put more money into alternative investments. A majority also said they would still would go for infrastructure and other alternative investment classes, even if they could have a 4% interest rate on government bonds. However with regards to solvency, people tend to hesitate making illiquid, long-term investments because it's not clear how these investments are treated regarding the institution's equity requirements.

Family offices in Germany especially like the asymmetric risk-return profile of hedge funds compared to equities and their ability to preserve capital in severe market environments. Some high net-worth individuals who sold their allocation into alternatives after the 2008 experience are now starting to be interested again.

AIFs versus UCITS funds: UCITS have unbeatable selling point

Over the next two or three years, the AIF brand will get more established, and investors may increasingly use alternative investment funds (AIFs) while at the same time the UCITS framework may become more restricted for alternative investments. However, UCITS have an unbeatable selling point: they are not classified as a hedge funds. As long as an alternative investment fund is classified as a hedge fund, then institutional investors have to hold it in the hedge fund or alternatives bucket, which is typically very restricted. Therefore, for regulated investors the discussion “do UCITS perform like offshore funds?” is irrelevant as many simply don't have other choices to get absolute return exposure: it is either UCITS or nothing.

But in the future, AIFs may be a good “middle ground” between the UCITS world where the funds are highly regulated, which may be a good format for less informed investors, and the unregulated offshore world. Over time also non-European managers will become more interested in either getting the AIFM license on their own, or in using platform type solutions offered by European licensed manager.

One year of AIFMD - a reason to celebrate? Who benefits, who does not? Why “reverse solicitation” isn’t the answer…

While AIFs may become more established, challenges still loom on the taxation side. Many funds and German investors are not 100% sure about the impact of the new regulatory environment, especially on their after tax returns, and around the marketing of alternative investment funds.

Clear guidance exists with regard to the German “Spezialfonds”: these are tailored for only one investor, and the discussion on setting up such a fund between a fund manager and the investor of such Spezialfonds is not regarded as marketing. If however you want to address the opportunities to unknown investors in Germany, marketing might be a tricky issue in the future.

This Roundtable, sponsored by Eurex and tax and legal consultant WTS, took place in Frankfurt on May 27th, 2014 at the office of WTS with:

  1. Vassiliki Veliou, Eurex
  2. Robert Welzel & Steffen Gnutzmann, WTS
  3. Frank Dornseifer, BAI
  4. Valentin Bohländer, HQ Trust
  5. Frank Umlauf, Tajdo
  6. Dr. Werner Goricki, Prime Capital
  7. Ahmet Peker, Deka Investment
This Roundtable also discussed:
  • What alternative strategies are attractive for German investors now?
  • Why has investor interest for Buxl, Eurex’ 30-year instrument, gone through the roof?
  • How is the industry moving from OTC towards a standardized world?
  • What could the next financial crisis look like? How to prepare? How should risk management adapt?
Enjoy!

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