UBS has shifted a fund of hedge funds onshore to Ireland from the Cayman Islands, delivering another blow to the reputation of the Caribbean tax haven as the domicile of choice for international hedge funds.
The Swiss investment bank says the move comes in response to rising investor demand for more regulated vehicles, a shift that is expected to continue to diminish the appeal of offshore fund centres.
The UBS fund that has been brought onshore, which has $565m of assets, uses a new Irish structure called an Icav (Irish collective asset management vehicle) that was passed into law last February.
Although more than 60 Icavs have been established since then, this is the first time the structure has been used to bring an existing fund onshore.
Pat Lardner, chief executive of Irish Funds, the trade body that represents asset managers in Ireland, expects "hundreds" more funds to make the transition from offshore vehicles to onshore Icavs in the next six months.
Bill Ferri, head of hedge fund solutions at UBS, says: “The Icav structure has created an opportunity for providers to give a breadth of strategy that was hard to offer before in an onshore fund. We were finding a preference to have funds regulated in the jurisdiction where the investors are.”
While demand from existing investors was a primary driver for bringing the fund onshore, Mr Ferri also sees the transition as a marketing opportunity. “This certainly increases the breadth of sales. It is easier than trying to fit the square peg of a Cayman fund into the round hole of the European market,” he says.
UBS’s decision follows a series of setbacks for the Cayman Islands. In August it emerged that the European Securities and Markets Authority, the regulator, had not even begun to assess whether hedge funds domiciled in the Caribbean tax haven would be granted a pan-European marketing passport.
Hedge fund managers domiciled in the Cayman Islands, the US, Hong Kong and Singapore continue to face uncertainty over whether they will be granted this passport, which would enable them to sell funds more easily across Europe.
Anthony Travers, chairman of the Cayman Islands Stock Exchange, accused Esma at the time of adopting a "fortress Europe mentality".
A poll conducted last year by UBS and PwC, the consultancy, found that most institutional investors believed the EU’s new Alternative Investment Fund Managers directive, which introduced more stringent regulation of alternative funds, had enabled EU-based funds to take market share from their non-EU rivals.
Brown Brothers Harriman, a fund-servicing company, also posited that Luxembourg and Ireland, which between them are already the domicile of 81 per cent of funds with cross-border investors, will continue to take market share from offshore fund centres such as the Cayman Islands, the Channel Islands or British Virgin Islands.
The Ministry of Financial Services for the Cayman Islands did not respond to a request for comment.
According to Mr Lardner, the Icav structure can be used in three ways. Many fund companies, including Legg Mason, BlueBay and Old Mutual, have used it to set up funds that can be distributed easily across Europe and are also tax efficient for US investors.
UBS is now using the structure to bring funds onshore that were previously domiciled either in the Cayman Islands or the British Virgin Islands. This is likely to be the first of a number of such transactions, according to Mr Carty.
The third phase will be the transformation of existing Irish funds into Icavs, given they have a number of features (primarily tax efficiency) to make them more attractive than the older structures. - Copyright The Financial Times Limited 2015.
