Malta is considered the newcomer to Ucits hedge funds, although the country’s service providers were well acquainted with the products before EU membership in 2004. Joining up gave Malta’s financial services industry a stamp of approval. This also meant Ucits funds could be passported to other EU member states.
Malta implemented the Ucits III regime immediately on accession. Malta’s choice as a domicile for a Ucits hedge fund is usually based on several factors including the efficiency and flexibility of the Malta Financial Services Authority (MFSA), quality support services available in the jurisdiction, relatively low set-up and maintenance costs and an exemption from income tax and capital gains tax at fund level and at non-resident investor level, irrespective of the legal form adopted. There is a possibility to set up self-managed funds and fund managers may be established as a Maltese company which allows tax refunds on distribution of dividends. Finally Malta, like other jurisdictions, offers the possibility to redomicile a fund from elsewhere relatively easily. A fund can migrate to Malta without having to be wound up, subject to certain relatively straightforward conditions.
Since EU accession Malta has also built up its hedge funds business. Dermot Butler at Custom House Global Fund Services, the Malta-based parent company of Custom House Group of Companies, says the jurisdiction is basically in the same place Ireland was 15-20 years ago when it first started its funds business. Then people said Ireland had little chance of challenging Luxembourg, remembers Butler, but Ireland went after the alternative sides and built up what has become the leading jurisdiction for fund administration of hedge funds and other alternatives products.
Malta has built up its hedge fund business primarily by attracting the smaller start-ups and emerging managers. The attraction is not just price, although some aspects of Malta’s offering may be cost competitive compared with Ireland and Luxembourg. One of its main selling points, if not the key one, is the regulator. The MFSA has a reputation for having the time to listen to ideas from managers thinking of setting up a fund structure in Malta. It is universally acclaimed to be open and approachable, flexible yet firm. This is a regulator, say those operating in Malta, that takes a sensible no--nonsense approach to regulation.
When applied to Ucits, MFSA is seen as keen to adhere to the spirit as well as the letter of the law. This is important. Some regulators in the EU, say many in Malta, tend to bend the rules in order to allow hedge fund strategies to use a Ucits wrapper even though there is more than a question mark about their suitability as a Ucits product.
The MFSA is still flexible in discussing terms with funds looking to set up a Ucits structure. However, it will seek “comfort” from other regulators or informally consult the committee of European securities regulators (Cesr) if it has questions over the suitability of the structure. “The MFSA is not afraid of referring or consulting. It doesn’t just approve a fund and let the operator face the music,” says Andre Zerafa, a partner at Ganado & Associates.
If there is any doubt that another regulator might not agree with the interpretation of Ucits being used, Zerafa believes there is an obligation to ensure other regulators in the EU will accept the structure. Otherwise, points out Zerafa, a fund could find it is rejected in another jurisdiction and that could cause problems. “The regulator should ensure that if a fund is given a licence it can be passported without any problem,” he says. There have been cases of a jurisdiction giving the green light to a suspect structure only to have other jurisdictions reject it.
Some like Zerafa wonder whether Ucits is a structure suitable for the majority of hedge funds. “Most hedge fund mangers would find it difficult to convert their hedge funds into Ucits hedge funds. It imposes conditions and restrictions they are not used to. At the moment hedge funds are not used to restrictions on how they managing their portfolios. Opening a Ucits hedge fund is a bit like a sex change operation for them. It is not something they do lightly,” notes Zerafa.
Joseph Saliba at law firm MAMO TCV agrees: “There is a question of Ucits hedge funds. To us it is a strange animal.” He says that some hedge fund strategies clearly cannot be made to fit within Ucits: “Ucits hedge funds still need to be tested by the MFSA to ensure the promoter is following the directive’s rules and there are no hiccups.” He points out that the MFSA also is proactive in issuing guidelines and notes to explain its reasoning when implementing directives as well as Maltese regulations.
Zerafa thinks the reason funds are looking at Ucits products reflects the uncertainty over the alternative investment fund managers (AIFM) directive stuck in Brussels. Under Ucits there is at least some certainty, he admits, compared with the uncertainty of whether offshore funds or even onshore regulated funds like Malta’s professional investor funds (PIFs) will be allowed when AIFM finally hits the statute books. PIFs are not regulated as tightly as Ucits funds and are targeted at financially literate investors. Hedge funds, private equity funds and property funds are normally structured as PIFs. These funds can be set up as standard or self-managed schemes.
He points out that if AIFM allows funds that comply with the -directive to be passported across the EU, that could be a better alternative to Ucits, particularly if the fund can operate under a less restrictive regime.
Simon Tortell of Simon Tortell & Associates thinks under Ucits IV, Malta. like others, may find that a master/feeder structure becomes the norm, particularly for US-based hedge fund managers. Under this the master would remain Cayman or -Delaware--domiciled with a feeder fund that is Ucits compliant to allow easier access by European investors.
Tortell also thinks Malta will be well-placed to take advantage of other aspects of Ucits IV, particularly as the country has always allowed hedge funds to outsource services to other EU jurisdictions. This means, for example, that a management company set up under Ucits IV in Malta could keep its fund administration in Luxembourg or Ireland.
Something everyone agrees on in Malta is the lack of choice of custodian. Without a wider selection beyond the two main providers – local domestic Bank of Valletta and international HSBC – few believe Malta will be able to attract a large number of Ucits hedge funds or platforms offering a quick route to a Ucits structure.
While HSBC is recognised worldwide, Bank of Valletta is less well known. “It is a question of a chicken and egg situation,” explains Saliba. “In this case the first step is the custodian which is the chicken. You have them and the eggs, the Ucits funds, will follow.”
Negotiations with a number of global custodians are underway with Malta and many confidently expect at least small operations by a few of them to open before the end of the year. The idea would be to have a relatively small presence and gear up once the business comes in.
Ucits funds are the new black in the Hedge Fund universe. Malta is the the forgotten treasure of Europe, and it has Ucits too.