Spain may limit hedge fund choice

The opportunities for the development of the hedge fund industry in Spain could be seriously limited if the current text of the new regulation on investment funds is passed without modifications.

Following a model similar to the one approved in Germany, only institutional investors will be allowed to invest in single hedge funds, with funds of hedge funds open to both the retail and institutional segments.

However, and contrary to what German regulation allows, the underlying funds included in the new fund of funds vehicles will be strictly limited by their domicile. Only hedge funds domiciled in OECD countries will be permitted, excluding those based in “tax havens” under Spanish law. This means Spanish investors will not have access to some of the largest hedge funds domiciled in the Cayman Islands, Bermuda and the British Virgin Islands, ending up with a seriously limited universe.

“Limiting the investment universe will have a negative effect on investors,” said Borja Largo, director of investment consulting at Allfunds Bank in Madrid. “Everyone is going to focus on the same niche of funds, which is a very reduced one, so all the portfolios will be very similar, with the danger that concentration carries.”

“But I think this could be an incentive for some houses for launching OECD hedge fund products because, with such a reduced universe, if the product is only relatively good, funds of funds will have to buy it,” Mr Largo added.

Whatever the final outcome, hedge funds will be a main focus for the Spanish market. Even if the current text is approved, the regulator will be forced to revisit some of these limitations. Spanish banks believe they will only have to wait for a couple of years to see a legal framework that will put hedge fund investing in Spain at the same level as in other European countries.

Catch up: Spanish banks think hedge fund investment will eventually be on a par with the rest of Europe