London hedge funds ruling at end of month

The future of London as the hedge-fund capital of Europe, along with the €700bn (€820bn) of assets money managers control, may be determined by a market watchdog this month.

The Paris-based European Securities and Markets Authority will recommend this month whether hedge funds, private equity and real-estate funds based in some countries outside of the EU should be able to continue selling products within the bloc. 

The opinion will be closely scrutinised by London-based fund managers because it could become a template for when Britain exits the EU.

“This decision is an important test and will set a precedent for UK alternative funds and their access to a marketing passport for European investors post Brexit,” said Lisa Cawley, a partner at law firm Kirkland & Ellis in London.

“If other third countries are allowed access by ESMA, then it will be easier for London funds to get approval,” she said.

The so-called Alternative Investment Fund Managers Directive passport for non-EU funds may become mandatory from 2018.

Only investment firms based in the bloc will be able to sell their products to European clients once the new rules kick in. 

ESMA will recommend this month whether those based in countries with “equivalent” rules will also get a passport to do business.

About 85% of Europe’s hedge-fund assets are managed out of London, making it the second-largest centre after New York. 

Hedge funds and other alternative funds manage about 10% of all assets in the country, according to estimates from industry group TheCityUK.

“In theory, extending third-country AIFMD passporting to the UK after Brexit should be straight-forward,” said Matt Huggett, a partner at law firm Allen & Overy in London.

“In practice, it will be a political decision with an uncertain outcome. Many managers would like to safeguard themselves beforehand and set up offices in places like Luxembourg and Dublin,” he said.

ESMA will make a recommendation to the European Commission this month on whether to extend passporting to funds in countries with similar rules to the EU, according to an ESMA spokesman in Paris.

Countries being considered are: Australia, Bermuda, Canada, Cayman Islands, Hong Kong, Isle of Man, Japan, Singapore and the US.

“The Commission is awaiting ESMA’s advice and hasn’t yet taken a decision yet,” according to a spokeswoman for financial services at the EC.


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