A new report by KPMG does not see a
major trend of alternative investment funds leaving offshore financial centres,
but it recommends managers follow a dual strategy involving both offshore and
onshore funds to attract European investors that are new to alternative
The study “Transformation: The
Future of Alternative Investments” finds that managers and administrators
perceive regulation in response to the financial crisis and governance issues
as the biggest challenges to the industry in the next three years.
However, investors do not believe
that regulation is going to produce any tangible benefits, the report said.
On the contrary, the study’s
surveyed respondents, which included more than 200 investment managers, fund
administrators and institutional investors, expect regulation will add costs
and bureaucratic burden and stifle creativity within the industry.
A specific threat from a Cayman
perspective is that the alternative investment industry may, as a result of
regulation such as the EU Alternative Investment Fund Manager directive, move
away from offshore jurisdictions and relocate onshore.
Some managers have done so already,
while others have launched funds in onshore locations, such as Dublin, Ireland,
in addition to their offshore funds, the report said.
According to KPMG, however, 81 per
cent of institutional investors indicated that domiciliation has little impact
on their allocation decisions. Investors with longer tenures of investing in
alternative investments tend to be the least concerned with fund domiciliation,
the report said. “Managers would therefore be wise to maintain their offshore
fund range for their bedrock investors,” KPMG concluded.
Those respondents who would prefer
to allocate to funds that are domiciled onshore are typically new investors to
alternative investments. This type of investor also insists on more liquidity
and transparency, the report said. In order to attract this next wave of
investor’s capital, managers should, at least in Europe, follow a dual strategy
involving both onshore and offshore funds.
Although, alternative investment
domiciliation is diverging, the traditional homes of the hedge fund and private
equity industries are not under significant threat, according to KPMG.
“[Offshore jurisdictions] will
continue to be the logical place to go for funds aimed at the traditional
alternative investor,” the report said. “However, EU domiciles are developing
complementary structures to compete for this business and appeal to the new generation
“There’s an interesting distinction
here and an important observation for the Cayman Islands,” said Wanda Mellaneo,
a director with KPMG in the Cayman Islands and chair of the editorial team that
produced the report. “While investors are clearly looking for products with increased
transparency and liquidity, they do not seem to be demanding regulated
“Nor are they particularly
concerned with the question of domicile, which runs counter to how much
attention the onshore/offshore debate has attracted lately,” she said.
Overall the report concludes that
changing demands from institutional investors are transforming the alternative
investment industry. Following a number of high profile fraud cases, all survey
participants stated that they now take a heightened interest in the back-office
operations of alternative investment funds.
The traditional relationship between
institutional investors and managers is evolving due to demands for increased
transparency, liquidity, more extensive controls and flexible product
strategies. This affects not only fee arrangements or servicing agreements but
also the entire business model of alternative investment funds.
Anthony Cowell, partner at KPMG in
the Cayman Islands and principal author of the report said: “Historically,
anyone considering an investment in alternatives had to invest on the manager’s
terms. Today, the picture of the industry has been turned on its head; it’s now
one in which investors are firmly in the driving seat and, fundamentally,
investors want to see managers’ interests more closely aligned with their own.”
As the majority of institutional
investors intend to increase their allocations to alternative investments over
the next three years, according to the report, their growing influence is not
likely to wane.
Fund administrators are also
affected by this transformation as demands for reporting transparency and
liquidity requirements necessitate greater standardisation.
The need to provide ever more data
to fund managers and regulators will require “robust and flexible technology
platforms that are capable of high-volume transaction processing and customised
‘real-time’ reporting,” KPMG wrote.
For most administrators, who are
operating at or near full capacity, this may raise serious infrastructure
issue, the report said.
Andy Stepaniuk, head of alternative
investments at KPMG in the Cayman Islands and co-author of the report, noted
that there is also an emergence of a new breed of manager.
“Recently, we’ve seen the rise of
the entrepreneurial-institutional (EI) manager; one that’s more formalised and
offers clients multiple products (including complementary services like
financing, private placements and proprietary trading, for example) through
multiple distribution channels,” he said. “Despite their size, though, they
seem to have managed the balance between the needs of a creative environment
and the rigidity of the institutional infrastructure that investors are