AIFMD: Challenges and Opportunities for Malta's Hedge Funds Industry
This article by Dr. Charles Cassar was featured in HFM Week's 2012 Malta Special Report. The originala article can be accessed by following this link.
Over the last few years, Malta has worked hard to position itself as a domicile for hedge funds (in the sense of collective investment schemes marketed exclusively to investors meeting certain minimum sophistication criteria) and has achieved considerable success in this regard, such that one may well speak of the country as an established jurisdiction in the sector. Between 2004 and June 2011, a total of 661 new funds were licensed, and the net asset value of all Malta domiciled funds was €7.8bn at the end of June 2011. Much of this growth is the result of the set up in Malta of a large number of Professional Investor Funds (Pifs), the local hedge fund product; 407 Pifs were domiciled in Malta at the end of June 2011.
Given the industry’s importance to the Maltese economy (and to the ecosystem of support service providers that it
has generated), it will not surprise anyone to learn that when the directive was first announced in April 2009, it attracted keen interest from local stakeholders. It is also safe to say that the Directive did not win any popularity contests when it was first unveiled, although its proposal for an EUwide fund passport garnered many approving nods.
The initial April 2009 proposal was controversial for many reasons. The draft had apparently been put together
in a hurry. This resulted in a text that was occasionally unclear and seemed to indicate insufficient familiarity with
the industry, by, for example, not including provisions addressing the self-managed fund structures (quite popular
in Malta). More damagingly, the directive was accused of being protectionist by a variety of stakeholders, largely due
to its third country provisions apparently being intended to create an impregnable Fortress Europe. It was unclear
what the directive’s impact on the Maltese industry could be, and the possibility of it being negative was real.
Good news for Maltese hedge funds: The AIFMD Directive Takes on a more sensible shape
Thankfully, during the months following the initial announcement, the directive gradually to took on a more
sensible shape. The final text of the Directive is now less protectionist and far more in tune with the realities of the
funds industry than the original April 2009 text. The drafting of the text is much clearer and it appears that Fortress
Europe will not materialise. Best of all, the one proposal that the industry welcomed fully from day one, the passport, has been retained.
Impact on the Maltese Hedge Funds Industry
What does this mean for Malta? A number of factors need to be borne in mind when considering the likely impact of
the directive on the Maltese industry, namely:
- The De Minimis Rule
- The nature of the current hedge funds regime
- The local depositary infrastructure
The De minimis rule: many Malta hedge funds will be unaffected by the Directive
The first thing that needs to be noted is that, in Malta, the Directive’s edge is likely to be blunted quite considerably
by the application of the De Minimis rule. The jurisdiction has primarily succeeded in attracting interest from smaller
fund managers with total assets under management inferior to the €100m threshold established in the Directive.
This is important because it means that many of the fund managers that are established in the jurisdiction will
not need to bear the additional regulatory burden the Directive introduces. The other side of the bargain is that
such AIFs will not benefit from the passporting rights.
This has fairly limited importance as a disadvantage: these funds are already in a position where they do not have
passport rights and, should they consider it beneficial to obtain a passport, they can opt in by assuming the higher
levels of regulation.
The Nature of the Current Malta Hedge Funds Regime
Those funds that will fall to be regulated under the Directive (or choose to be so regulated) will take comfort
from the fact that many of the Directive’s rules are rather familiar. Malta has built its reputation as a hedge funds
domicile by emphasising “firmness” as well as “flexibility” and thus many of the provisions contained in the Directive are already present and correct in the Maltese rulebook. Thus the rules on, for example, fund administration, already have their counterparts in local legislation. Other rules, such as those regarding remuneration, may
pose some kind of challenge but are unlikely to have a significant impact.
The Depositary infrastructure: Maltese hedge fund custodians and depositaries
One AIFMD provision that may have a negative impact on the local funds industry is the rule that every AIF must appoint a depositary in the same jurisdiction in which it [the AIF] is established. Malta’s success in attracting funds and their managers has generally been matched by an equivalent growth in the network of funds services providers, which constitutes the essential infrastructure required for any funds jurisdiction to thrive. A fairly wide choice of big name fund administrators and auditors, as well as lawyers specialising in the funds and financial regulation,
can now be found in the jurisdiction. The same cannot be said of providers of depositary services. Only a limited number are present at the moment and not all are internationally recognised brand names.
This may be problematic for the continued growth of the industry. Because of the AIFMD provision in question, if the local depositary infrastructure cannot support a fund, the AIFM in question may have no choice except to domicile its AIF elsewhere. This may funnel business towards more mature fund domiciles that host service providers having the required knowhow or specialisation.
AIFMD: An Opportunity for the Malta Hedge Funds Industry
The final text of the Directive is less protectionist and more in tune with the realities of the funds industry than
then original April 2009 text. Nevertheless, many AIFM, both EU as well as non-EU, are likely to be re-evaluating
their domiciliation options in the coming years. Non-EU fund managers may find that an EU domicile gives them
easier access to EU investors; others may deem an EU domicile to be unnecessary but will need to identify a
suitable reference jurisdiction; both EU as well as nonEU AIFMs may start looking for a jurisdiction they can use as a central hub from where to passport their services and funds into the rest of the EU; all of these scenarios are likely to arise.
Malta already has various characteristics that make it attractive as a hedge fund domicile, such as the attitude of
the regulator, the general cost-effectiveness of the country, a competitive fiscal regime and an English speaking workforce. These characteristics have led to the growth that the country has achieved so far. During the various reviews of domiciliation status which the AIFMD will inevitably trigger, these characteristics are likely to place Malta among most shortlists.
It must be said that the situation is still somewhat fluid. The Directive’s level II implementing measures (which I
have excluded from this discussion) are still being developed. Bold predictions are therefore likely to end in embarrassment for the would-be clairvoyant. Nevertheless, it is quite clear that the Directive will not, as may have initially been feared, threaten the survival of the local hedge funds industry. On the contrary, the coming into force of
the Directive is likely to generate an important window of opportunity, which will help to further cement Malta’s position as a leading fund domicile
