Alternatives to have their day in Spain

It’s hedge fund season in Spain as the new regulatory framework is expected to open up new opportunities for the development of this asset class and the alternative investment sector as a whole. Over the last year, and since the first draft of the regulations was seen by the industry, the main focus of discussions has been on how the hedge fund industry was going to be regulated.

According to the latest draft, that is expected to be approved within weeks, hedge funds – fondos libres – will have freedom when it comes to their investment policy and flexibility in terms of information and liquidity. Only qualified or professional investors will have access to single hedge funds, which will not have limits regarding their fee structure.

On the other hand, the regulation also contemplates the introduction of funds of hedge funds (FoHFs) in which the retail sector will be able to participate. Delegates at the European Fund Series conference in Madrid heard that the new FoHFs will have to invest a minimum of 60 per cent of total assets in Spanish hedge funds or those domiciled, or whose manager is domiciled, in OECD countries.

It is expected that once the regulation is approved it will be the FoHFs the one that will develop faster. “The big institutions are looking for solutions to respond to the retail market with a product that the new regulation will allow them to offer,” said Iván Poza, partner at Nibc Petercam Gestión, “When they promote a product in terms of retail distribution we are talking about big volumes so they will probably opt for funds of funds with managed accounts so they can have access to a lot of investment capacity,” he explained.

“In private banking they tend to go with advisers. We are currently in conversations with many companies in the sector so when the regulations comes into force we have tailor-made products for them,” Mr Poza added.

For Eusebio Díaz-Morera, president of EDM Holding and president of the Alternative Investment Management Association (AIMA) in Spain, the regulator – Comisión Nacional del Mercado de Valores (CNMV) – is trying to promote the development of a national hedge fund industry which according to him will not be an easy task.

“No one talks about the figure of the prime broker and this is essential in order to develop a local industry. If a Spanish hedge fund manager wants to launch its own hedge fund, he will have to go to London to find a prime broker.” Mr Díaz-Morera said that the FoHFs route will be the preferred option for many of the players in the market. He mentioned liquidity as an issue that is becoming essential when it comes to selling hedge funds, advising Spanish institutions wanting to break into this market to set restricted and limited liquidity periods so investors know right from the beginning that investing in hedge funds is not the same as investing in traditional investment vehicles.

Once the regulation is passed, the CNMV will have to publish detailed circulars regarding operational practicalities to do with liquidity valuations, NAV calculations and the role of the depositary bank and the custodian of the funds.

“When it comes to hedge funds the problem we encounter is that the CNMV says that if we are the depositary bank we have to control and supervise these funds but it doesn’t tell us how to do it,” said Elena Mesonero, head of sales and clients relations at BNP Paribas Securities Services.

For those players already present in the market, the new regulatory frameworks will give them the chance to put into practice what they have been preparing for as well as it will introduce Spanish investors, especially retail investors, to a new asset class.

“It is a new asset class and we cannot follow the same approach we have when investing in traditional products,” said Ignacio Morais, portfolio manager at CM Capital Markets. “Risk doesn’t need to be higher, only different, and aspects like due diligence will become very important.” He adds: “The only way to get prepared for this is by having done your homework, so you are ready for when the regulation is approved.”

New opportunities will no doubt attract new players to the Spanish market, but the question now is whether Spanish investment professionals are entrepreneurial enough to leave their jobs at the big banks to set up their own hedge fund and develop a local market in the country. For the time being, FoFHs will probably be the vehicle of choice.

‘The only way to get prepared for this is by having done your homework, so you are ready when the regulation is approved’- Ignacio Marais, CM Captial Markets