Recent regulatory change, principally the introduction of the Alternative Investment Fund Managers Directive (‘AIFMD’), has made the marketing of hedge funds in the European Economic Area (the ‘EEA’) more involved, particularly for managers based outside the EEA. This appears to have led some US investment managers to reduce their marketing in the EEA. However, given that European investors account for around 20 per cent of global hedge fund assets under management, it is likely that this reaction to the more onerous regulatory environment that now exists in Europe is simply temporary. Our article (available here) provides an overview of the key regulatory requirements relevant to marketing a fund in Europe and discusses how US hedge fund managers may best access capital in Europe.
Prior to the implementation of AIFMD, US investment managers typically relied upon the private placement rules of each EEA member state to access capital in the EEA. Unfortunately, most EEA member states have either since withdrawn or significantly restricted their private placement rules, albeit the UK and Switzerland, two key sources of hedge fund capital, remain generally accessible.
A US manager wishing to access capital in Europe now has a number of options. The least onerous way to access capital is through reverse solicitation, which falls outside the scope of AIFMD. Reverse solicitation is founded on the basic premise that regulation should not restrict investors from approaching investment managers at their own initiative. However, the ability to rely on this option is limited, and most investment managers will struggle to attract significant capital through this means alone.
To the extent a US manager manages a non-EEA domiciled fund (for example a Cayman fund), it will need to rely on the private placement rules of each EEA jurisdiction (and will need to comply with certain requirements provided under AIFMD).
Another option is to set-up an EEA domiciled fund, to be managed by an EEA domiciled manager (with certain investment management being retained by the US manager or delegated to it). This allows the fund to take advantage of the marketing passport made available under AIFMD.
Whilst it is unlikely that EEA domiciled funds will replace the Cayman fund structure more familiar to US investors, there has been an increase in the number of investment managers setting up EEA domiciled funds alongside their existing non-EEA funds, owing to their increased marketability in Europe. EEA funds established as a UCITS have been particularly successful in raising capital in Europe, since UCITS also have access to marketing passports.