The European financial watchdog’s latest decision over passporting has not had the expected impact on Asian alternative fund managers.
The recent decision has pushed back the timetable for a final outcome over the extension of the European passporting regime for Asia-based fund managers.
But lawyers have said that hedge fund managers have been using alternative methods to access Europe anyway, meaning passporting was not such a priority for them.
Under the alternative investment fund managers directive, non-European Union alternative fund managers could apply to have their products comply with stringent AIFMD rules in exchange for the opportunity to sell their products across Europe. This feature has often been hyped up by EU regulators to entice fund managers to comply with the regime.
In late July, the European Securities and Markets Authority (Esma) recommended a delay to decisions on whether to give Hong Kong, Singapore and US-based alternative fund managers access to Europe.
In contrast, Esma has recommended that fund managers based in Guernsey, Jersey and Switzerland be given access to EU markets.
However, the decision may not matter much for fund managers, said a Hong Kong-based legal counsel for an alternatives fund.
“[AIFMD passporting] is not an immediate issue. Hedge fund managers live in the moment and passporting may still be some years away anyway,” said the in-house lawyer.
Like many hedge funds in Asia, most of the investors are from the US. Fundraising still currently relies on reverse solicitation, which involves European investors seeking out Asia-based funds on their own initiative as opposed to active marketing by Asian fund managers.
Another route involves marketing of foreign funds in EU member states under individual national private placement regime (NPPR) laws, although this is expected to be phased out by 2018.
Stéphane Karolczuk, Hong Kong-based lawyer at Luxembourg law firm Arendt & Medernach, acknowledged this trend for alternative avenues of accessing Europe. He noted that some of his firm’s clients were currently relying on reverse solicitation or appointments of third-party EU-domiciled alternative investment fund managers, such as in Luxembourg, thereby allowing them to take advantage of the passporting scheme to market across the EU.
Regardless, one of the reasons why Asian and US fund managers have been sidelined from the passporting scheme – at least for now – is the question of reciprocity.
Another lawyer, who declined to be named, said: “If you read between the lines, it is clear that the EU is also willing to make sure that, if they give the passport to non-EU managers to come to the EU with their products, EU managers will have similar access to those markets as well so that there would be some sort of reciprocity.
“Providing similar access to your market is indeed one of the conditions that is reviewed in detail by Esma when assessing jurisdictions, such as in this case Hong Kong, Singapore or the US."
This is made especially explicit for US fund managers hoping to access the European market, with Esma noting that EU-based alternative investment fund managers looking to market funds to US investors is practically more difficult to do than the other way around.