France finally opens door to hedge fund investment

The prospect of jail may still face foreign hedge funds caught marketing in France, but the rules governing investment in alternative assets by French mutual funds (OPCVM) have just been relaxed.

The Autorité des Marchés Financiers (AMF) has introduced regulations to provide for new OPCVM structures that are allowed to invest in hedge funds.

While French asset managers are free to use alternative investments in separate account mandates, prior to the new AMF regulations, OPCVMs had limited access to hedge fund strategies because they were not permitted to use prime brokerage services.

Aria family

The new rules provide for the creation of two types of fund structures, namely OPCVM Aria and contractual funds. The former category is divided into simple Aria, Aria EL (leveraged funds) and Aria FA (funds of alternative funds).

Aria FA may invest up to 100 per cent of their assets in so-called Eligible Alternative funds (EAF), 90 per cent of which must be listed on a recognised stock exchange. To qualify for eligible investment status, these funds must first comply with certain AMF criteria which include rules prohibiting investment in vehicles registered in countries which lack anti-money laundering regulations.

Asset diversification rules dictate that Aria FA must invest in at least 16 EAF or else invest 20 per cent of total assets in a minimum of five EAF. The minimum investment in an Aria FA is ?10,000. Simple Aria, which are limited to qualified investors or a minimum subscription of ?125,000, enjoy more flexibility and may invest up to 50 per cent of their assets in non-listed EAF. They are also allowed a leverage of up to 100 per cent of their assets.

Aria EL, may also invest up to 50 per cent of their assets in non-listed EAF, but they are allowed a gearing of up to 300 per cent of their assets. These funds are allowed to use a prime broker, but rehypothecation is limited to 140 per cent of the debt level of the fund. Aria EL funds also carry a minimum investment of ?125,000. Contractual funds, which are open to professional investors with at least ?250,000, are free to invest in both eligible and non-eligible foreign funds. There is no limit on leverage and no asset diversification rules are imposed.

Such funds are allowed to calculate NAVs quarterly, to operate 90-day redemption periods and to lock up funds for a maximum of two years. This compares with the monthly NAV calculation and 35 days redemption period required by the Aria fund structures. Contractual funds are also permitted to use a prime broker. There is no limit on the rehypothecation level that can be granted to the prime broker.

Expected take-up

Jerome Sutour, an avocat à la cour (solicitor) at international law firm Simmons & Simmons in Paris, says he expects a strong response from qualified investors to the contractual funds on account of the lack of investment restrictions.

He adds that the Aria funds will appeal primarily to high net worth individuals and to a lesser extent, professional investors. Mr Sutour comments: “The AMF is very efficient and has taken its time to scrutinise what is happening in the hedge fund market. Because the rules are now quite flexible for these new collective investment schemes, the market should develop.”

‘Because the rules are now quite flexible for these new collective investment schemes, the market should develop’ - Jerome Sutour, Simmons & Simmons