Swiss wealth managers are increasingly looking into AIFMD-compliant hedge fund managers and are starting to establish their own Luxembourg platforms.
This is according to Patrick Ghali, a partner at the hedge fund advisory firm Sussex Partners, which is working with both Swiss and the UK clients, and has offices in London and Zurich.
Ghali noticed that in Switzerland, the use of off-shore funds is more common than in the UK, however this trend is slowly starting to turn.
‘There is a switch to AIFMD-compliant Luxembourg and Irish structures, but it is still in its infancy. It is not clear how investors are going to accept those but there is definitely movement.’
Ghali said Swiss wealth managers are increasingly putting infrastructure in place for Luxembourg platforms. He added that for an onshore structure investors need enough people and a Finma licence, which means the fund structure quickly becomes very time and cost intensive.
‘People are really thinking about the infrastructure side of their businesses at the moment and how to share resources in that regard. I think a lot of independent asset managers are really asking themselves if it makes sense for them to build a proprietary system.’
Focus on multi-strategy funds
The adviser said in the hedge fund space, quant strategies are trending at the moment but investors shouldn’t be exclusively exposed to these kind of funds.
‘A lot of quant strategies have been really suffering in 2016. It is hard to generalise but many of them have made a lot of money in fixed income and when the bull market in that asset class starts to reverse, they will suffer more.’
Ghali said for most clients the allocation to emerging market hedge funds would be a satellite one, while the core allocation would usually consist of multi-strategy funds.
‘Thematic multi-strategy fund of funds invest globally but have the ability to be concentrated on their themes.’
Eyes on Japan
Ghali said on a regional level, many of investors would often opt for European hedge funds as it is quite difficult to do due diligence on Chinese or Japanese names, for example.
‘The reporting you get is in Chinese or Japanese, which can sometimes be badly translated into English. The cultural barrier is quite big for Western investors who may fly to those countries only once or twice a year and look at the names everyone knows but might miss the smaller firms that often offer better investment opportunities.’
Despite Japan being a difficult area for research, Ghali still favours hedge funds in the country. He said the existing information gap creates an advantage for those who get their data straight.
‘Japan is a great market with 3,500 listed companies. Only about 20% of those are being properly covered by analysts.’
In addition, he said the ratio of hedge fund assets to the overall market cap in Japan is small, only 0.2-0.6%, which compares to 4-4.5% in the US and around 6% in Europe.
'Post-2008, a large number of hedge funds pulled out of Japan and a lot of Japanese funds went out of business. This created an environment of less competition dominated by retail investors, big government pension funds and large global macro players, which distorted the market by buying stocks indiscriminately, thereby creating opportunities for smaller fundamentally focused players.’