|
Marcus Storr Matthias Knab, Opalesque for New Managers: At the Alternative Investment Conference of the Bundesverband Alternative Investments e.V. (BAI) in Frankfurt, Marcus Storr, Managing Director Alternative Investments at FERI and a board member of FERI (Luxembourg) S.A., addressed a packed room - and flagged something striking about the moment itself. For the first time in his 25 years in the business, the calls are coming the other way around: instead of houses like FERI having to reach out to institutional investors about hedge fund allocations, German institutionals are now picking up the phone themselves. Interest is high - and it traces back, Storr argued, to what their long-standing reluctance has actually cost them.
His central message dispels a stubborn myth: that offshore hedge funds are off-limits for VAG-regulated investors. Wrong, says the practitioner who has spent a quarter-century doing exactly the opposite - and he ran the numbers to show what German caution actually leaves on the table.
Putting a Number on the Opportunity Cost
Storr opened with the unvarnished entry point: the money. Model calculation - an institutional investor with a one-billion-euro total portfolio, a hedge fund quota of 7.5 percent (already at the upper end of what is customary in Germany), so 75 million euros allocated to hedge funds. The only question: how?
An exclusively UCITS-compliant approach lands, in the FERI model, at 4.1 percent annualized return, a Sharpe ratio of 0.22, and cumulative earnings of 12.2 million euros over three years. A conservative offshore portfolio delivers 5.6 percent p.a. over the same period at a Sharpe ratio of 1.16; a dynamic offshore portfolio delivers 16.5 percent p.a. at a Sharpe ratio of 1.52. The unrealized return over three years: 4.7 million euros in the conservative case, 31.5 million euros in the dynamic case. On the hedge fund slice of a billion-euro portfolio alone.
It is this figure that puts the room on the spot early. The question is not whether the UCITS world works - it does, in sub-strategies like equity long/short, merger arbitrage, or global macro - but what it costs to confine oneself to it.
Where the Action Really Is
The market distribution is unambiguous: roughly 10,000 hedge funds worldwide manage about five trillion US dollars. Of these, FERI estimates only 500 are set up as UCITS-compliant alternative funds - and 9,500 are offshore. In the global equity long/short universe, 88 percent are offshore structures, with the majority of managers based in the United States. The fund vehicles themselves are, with few exceptions, domiciled in the Cayman Islands.
Storr pushed back on the German reflex of equating this with tax havens or opacity. The vehicles sit there because that is where the most experienced administrators are based and where large American endowments - Harvard, Yale - hold their allocations. Sovereign investors like Norges, Norway's state fund, also conduct extensive on-site due diligence there. "When they have done due diligence in front of us in Cape Town or Tokyo and then invest half a billion, there is not a crumb left on that floor," Storr said. It is the pressure of global mega-investors - not necessarily regulation - that has lifted the quality of the industry massively since the financial crisis.
There is also an often-overlooked detail: every hedge fund managing more than 100 million US dollars is registered with the US Securities and Exchange Commission (SEC). The notion that offshore means a regulatory no-man's-land is outdated. That the funds do not fall under European law is correct - that they operate unsupervised is not.
Another picture from Storr's data: a geographic breakdown of the alpha generated over recent decades shows that even in Europe - the home market of UCITS - around 53 percent of alpha is generated in offshore structures. In North America the figure is 98 percent; in Asia ex Japan, 97 percent. UCITS simply does not capture what many managers can deliver strategically when they are not constrained by leverage limits, liquidity requirements, and distribution format.
The Real Bottleneck Is Not Regulation
The core of Storr's message: the VAG world allows more than most German investors believe. "We can only invest in UCITS" is a widespread assumption - and factually wrong. Offshore investments are implementable under VAG, provided the investor's administrative structure is set up for it.
What this concretely requires, Storr listed in four points:
A KVG (capital management company) that plays along. The KVG must document the requirements cleanly. The point is clear investment concepts, not new regulation.
A specialized law firm. In Germany there are three to four firms specialized in hedge fund investment law that have already produced corresponding opinions and VAG analyses repeatedly. The market is small but it exists.
A committee decision on allocation. The investment guidelines must be adjusted - that is a board resolution, not a legislative process. "The obstacle is organizational, not structural," said Storr.
An investment advisor with hedge fund expertise. The market for specialized advisors is small but it exists. FERI itself, by its own account, manages well over two billion US dollars in hedge fund AuM for its clients, of which 1.2 billion US dollars are in VAG-regulated offshore hedge fund mandates. FERI is currently invested in 43 offshore hedge funds and 20 UCITS funds.
Where things get tight is not the legislator but the downstream administration of German institutional investors. A German custodian bank that does not accommodate this, a depositary that will not go along, a committee member who still views hedge funds through the "mother-in-law perspective" of the early 2000s - those are the typical stumbling blocks. T+2 settlement and the daily NAV of a UCITS structure give way, in the offshore world, to a hedge fund subscription with four weeks' lead time and NAV reporting after six weeks. Anyone who has anchored this cleanly in the process once can repeat it.
What the Process Actually Looks Like
Storr sketched the legal due diligence architecture in two layers. The first runs the standard anti-money-laundering (AML) and PEP (politically exposed persons) screenings, regulatory comparability checks, and compliance with VAG restrictions such as the liquidity requirement under KAGB paragraph 227. The second encompasses document analysis by an external law firm, including the negotiation of side letters that align individual prospectus elements with VAG requirements. At ticket sizes upwards of around 30 million US dollars, such side letters can realistically be enforced.
The AML check itself typically takes one to three months, sometimes faster, and involves cross-referencing external databases for money-laundering and PEP risks. Storr noted that the board of directors of a hedge fund - particularly one based in the Arab or Asian region - may well include a sitting minister or political figure; this needs to be reviewed, not reflexively excluded. An additional background check per hedge fund (covering all key persons) costs five to ten thousand US dollars. Strategically, the investor decides between direct investment or a fund-of-funds vehicle, the latter coming with outsourced monitoring and cash flow control and therefore lower administrative effort.
What Hedge Funds Deliver in a Portfolio - And What They Don't
In crisis phases the diversification benefit shows up most clearly. In the 2022 tech sell-off - equities down 18 percent, bonds down 15 percent - the offshore hedge fund portfolios managed by FERI ranged between plus 0.5 and plus 3.0 percent. Across the more recent crisis periods, the MSCI World fell on average roughly 4.7 times deeper than the hedge fund portfolio. Translated into statistical language: a beta in crisis phases of around 0.15 to 0.2 - fully acceptable.
It is precisely this profile - combined with the fact that many pension funds and insurers were forced in 2022, due to the denominator effect, to sell private markets exposures in the secondary market at discounts - that is driving the current demand. That is what flipped the dynamic Storr noted at the outset: where his firm once had to do the reaching out, the calls now come from the investor side. The German know-how that has long been embedded in Anglo-Saxon institutions, and that German family offices already operate at a high level, is now finding traction and demand among insurers and pension funds as an additional multi-asset building block.
Where the Risks Actually Lie
Market risks - leverage, tail risk, factor exposures - are measurable, particularly in the liquid strategies that account for 85 to 90 percent of the hedge fund universe.
What concerns Storr personally is not the size of the industry but the size of individual players and their use of borrowed capital. The leading multi-strategy houses - Citadel, DE Shaw, Point72, Balyasny, Millennium - manage in some cases up to 85 billion US dollars in investor capital, with leverage in the ten- to fifteen-fold range. At fifteen-fold leverage, the equity buffer in the corresponding hedge fund is rather thin. In March 2026, when the geopolitical escalation of the Iran conflict caught the market off guard, several of these houses lost between three and six percent in a single month. For a large multi-strategy manager, Storr noted, that is highly unusual. FERI deliberately does not invest in this segment. Nor in activism: "When we turn to the German client and say we have just invested in an activist fund manager who walks up to a company's management with media pressure and a 'gun' in hand - that is not our approach."
Instead, the largest allocation block in the FERI hedge fund portfolios sits with equity long/short managers, often as a complement to existing long-only positions, designed to make the equity market exposure more asymmetric. The common denominator across all 43 offshore hedge fund investments: high-quality counterparties - administrators, prime brokers, auditors - and a consistent background check on every individual manager before investment.
Bottom Line
Storr's closing image stuck in four points:
1. Hedge funds are a meaningful diversification building block and improve the risk-return profile of institutional portfolios.
2. The relevant hedge fund universe is predominantly offshore. UCITS can replicate some strategies well but cannot capture many hedge fund strategies and alpha sources.
3. Offshore hedge funds are investable under VAG - the assumption that "only UCITS are permitted" is factually wrong. With the right partners, structured due diligence, legal opinions, and clear processes, VAG compliance can be established.
4. The real lever, then, lies not in the statute book but in the willingness of German institutionals to work through the process once. Those who do have not loosened the regulatory corset - they have discovered the room for maneuver inside it that VAG already grants.
|
RSS
