The hedge fund industry made its comeback in 2010 exhibiting an imposing growth. Global hedge fund assets augmented 11 percent to USD 2.02 trillion by the end of 2010 up from USD 1.82 trillion in the previous year. This took the industry back up to levels last seen in 2006 although still below the 2007 historic peak of more than USD 2.6 trillion. These capital inflows at a growing rate indicate that (institutional) investors keep on perceiving hedge funds as attractive alternative investment vehicles differing from traditional asset classes. Despite highly unstable and recessionary markets, many hedge fund managers succeeded in delivering robust returns.
Table of Contents
1. Executive summary
2. Historical background
3. Regulatory framework
4. Operational requirements
5. Taxation
6. Regulatory Framework: Categories of Regulated Fund
7. Authorisation of OEICS
8. Authorisation of AUTs
8.1 Operational Requirements: UCITS and NURS
9. Investment Trust Company
10. Marketing the Fund
11. Taxation
11.1 Taxation of the AIF
11.2 Transparency
11.3 Remuneration
12. Operational and Organisational Requirements
13. Regulated activities
14. Terminology: ‘Authorised Persons’ and ‘Approved Persons’
15. Proposed Changes And Developments
16. Conclusion
Objectives and Topics
The primary objective of this work is to analyze the growth of the hedge fund industry in the United Kingdom, exploring the underlying historical drivers of its success and the complex regulatory framework governing its operation. The research investigates how these funds navigate UK law, taxation, and organizational requirements, while also addressing the impact of recent financial crises and shifting regulatory landscapes.
- Historical evolution of the UK hedge fund market since the 1990s.
- Regulatory frameworks and authorisation procedures for OEICs and AUTs.
- Operational mandates including risk management, liquidity, and service provider roles.
- Taxation strategies for Authorised Investment Funds (AIFs) and the Investment Manager Exemption.
- Impact of EU-level directives and potential future regulatory developments.
Excerpt from the Book
Historical Background
The hedge fund industry in the UK really started to take shape in the 1990s. A number of factors made for fertile conditions for its success, including:
• the deregulation of the London Stock Exchange in 1986 (known as ‘Big Bang’), increasing access to financial markets;
• London's pre-eminence as a financial centre and the availability of a large talent pool of finance professionals;
• compensation structures within the more established institutions that did not reward younger talent as quickly or handsomely as hedge funds were able to do;
• a broadly favourable political, tax and regulatory climate;
• increasingly sophisticated technology, facilitating not only the development of new trading strategies but allowing business support functions to be provided at a much reduced headcount; and
• the growth of support industries such as the third party administration industry and other outsourcing models, allowing new asset management business to get to market quickly and relatively inexpensively compared with building in-house expertise.
Much as in the United States, the UK hedge funds industry exploded in size throughout the early and mid-noughties as more and more institutional asset allocators, sovereign investors and private wealth aggregators embraced alternative asset classes.
Then, in 2008, the hedge funds industry was deeply affected by the tumultuous events of the financial crisis. Lehman Brothers, Bear Stearns and Bernie Madoff combined with the overall dearth of liquidity and other factors to cause mass redemptions, depressed portfolio valuations, fund liquidity issues and other strife.
Summary of Chapters
Executive summary: Provides a brief overview of the hedge fund industry's recovery in 2010 and the sustained interest from institutional investors despite market volatility.
Historical background: Outlines the socio-economic factors that enabled the UK hedge fund market to flourish since the 1990s and its subsequent encounter with the 2008 financial crisis.
Regulatory framework: Discusses the mandatory authorization of persons performing regulated activities in the UK and the oversight responsibilities of the FSA.
Operational requirements: Details the standard service provider roles such as administrators and prime brokers that are essential for fund operations.
Taxation: Explains the Investment Manager Exemption (IME) and how it prevents non-UK resident funds from creating a taxable permanent establishment in the UK.
Regulatory Framework: Categories of Regulated Fund: Defines the classification of open-ended and closed-ended funds, specifically UCITS and NURS.
Authorisation of OEICS: Describes the legal governance and appointment requirements for Open-Ended Investment Companies.
Authorisation of AUTs: Covers the legal structure of Authorised Unit Trusts and the independent roles of trustees and managers.
Investment Trust Company: Outlines the corporate structure of investment trusts and their adherence to London Stock Exchange listing rules.
Marketing the Fund: Reviews the strict requirements for financial promotions and the necessity of using authorised persons for marketing activities.
Taxation of the AIF: Examines the tax treatment of Authorised Investment Funds, including the qualifying investments test and Tax Elected Fund (TEF) status.
Transparency: Details the disclosure requirements imposed on AIFMs regarding annual reporting and investor communication.
Remuneration: Discusses the introduction of restrictions on bonus structures and deferral requirements for hedge fund staff.
Operational and Organisational Requirements: Analyzes the implementation of risk management and liquidity testing standards mandated by recent directives.
Regulated activities: Identifies specific investment management actions that fall under the scope of UK financial regulation.
Terminology: ‘Authorised Persons’ and ‘Approved Persons’: Explains the distinction between regulated legal entities and the individuals performing controlled functions.
Proposed Changes And Developments: Highlights the transition of regulatory bodies in the UK and the influence of ESMA on future supervisory functions.
Conclusion: Summarizes the strategic use of offshore domiciles for tax efficiency while noting the integration of taxable and tax-exempt investors in master-feeder structures.
Keywords
Hedge funds, UK investment market, regulatory framework, FSA, UCITS, NURS, OEICS, AUTs, investment manager, taxation, AIF, remuneration, transparency, liquidity, risk management.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on the growth, regulatory environment, and operational landscape of the hedge fund industry within the United Kingdom.
What are the central themes covered in the text?
Key themes include historical market development, UK regulatory compliance, taxation strategies for investment funds, and the organizational structures required to manage hedge fund assets effectively.
What is the main objective of the study?
The objective is to examine why hedge funds have continued to progress in the UK despite the financial crisis and to detail the specific regulatory and legal constraints they face.
Which scientific or regulatory approaches are discussed?
The text analyzes the regulatory framework established by the FSA, the impact of EU directives like UCITS IV, and specific tax regimes such as the Investment Manager Exemption (IME).
What is treated in the main body of the text?
The body covers fund authorization types, detailed operational requirements for service providers, tax classifications for AIFs, and the implications of new directives on staff remuneration and organizational risk management.
Which keywords characterize this work?
Hedge funds, regulatory compliance, UK financial markets, taxation, AIFs, and operational risk management are the defining terms of this research.
How does the Investment Manager Exemption (IME) benefit hedge funds?
The IME allows a non-UK resident fund to appoint a UK-based investment manager without the fund itself being classified as having a permanent establishment for UK tax purposes.
What role does the 'Genuine Diversity of Ownership Condition' play?
It allows AIFs that are marketed sufficiently widely to treat gains on the disposal of investments as exempt capital gains rather than trading income, provided certain diversity conditions are met.
How does the master-feeder structure function?
It allows onshore and offshore funds to co-invest into a single master fund, enabling the investment manager to consolidate assets while providing tax-efficient entry points for different types of investors.
What are the 'controlled functions' within a firm?
These are specific roles, such as chief executive or portfolio manager, that require formal approval from the regulator for an individual to perform them.
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- Paulina Matera (Autor:in), 2013, The Growth of Hedge Funds, München, GRIN Verlag, https://www.grin.com/document/963344
