Time will tell if hedge fund fiesta can last

At the end of 2006 and after months of anticipation, the first Spanish-registered hedge funds were launched with the approval of the Comisión Nacional del Mercado de Valores (CNMV), the country’s securities market regulator. Since the first draft of the legal framework that will regulate these new vehicles was made public in the summer of 2004, there has been debate in the market about the adequacy of the regulation itself and the impact that the introduction of hedge funds will have on the country’s fund management industry as a whole. The opening up of the Spanish market to hedge funds present opportunities for both domestic and foreign players, but it will take a while before we see if the sector can really take off. By the end of December seven hedge funds were registered with the CNMV, although they are not representative of what many think the market will look like. Five of the new hedge funds are single strategy vehicles, but so far the majority of fund management firms applying for authorisation to manage hedge funds are planning to focus on the fund of funds sector. Market players are expecting to see a significant number of vehicles launched in 2007, increasing competition among managers and distributors. The Spanish gestoras, or asset managers, linked to the country’s largest financial institutions, were the first to make a move. BBVA managed to register the first Spanish hedge fund, which then surprised the market by its socially responsible nature. This fund, the BBVA Codespa Microfinanzas, will invest in unquoted securities linked to the microcredits sector, mainly focusing on Latin America. “The nature of the fund summarises the group’s vocation very well,” said Daniel de Fernando, director at BBVA Asset Management and Private Banking. “On the one side, we have the vocation of being innovative, and on the other hand the social commitment. We think it is significant that the first Spanish hedge fund has that component.” Mr De Fernando expects interest from investors in this product to come from both the private banking and the institutional sectors. He adds that the group is interested in seeing its hedge fund business grow, in both single strategy products and funds of funds. With this in mind, BBVA has established its own alternative investment division, BBVA Partners, and has gone into partnership with Schroders under the name Altitude Investments to develop fund of funds products. Similar routes have been followed by others. “During the past year we have seen agreements between large and medium-sized Spanish companies with foreign specialists to face the regulatory change, creating hedge fund management firms or associating themselves with investment advisers to launch funds of hedge funds,” said Mar Matilla, head of fixed income and alternative funds research at Allfunds Bank Investment Consulting. In December InverCaixa, the fund management division of La Caixa, asked for authorisation to start its fund of hedge fund business in association with EACM Advisors, part of the Mellon group. Another example is Caja Madrid, which will work with KBC Asset Management to develop its fund of funds range. Ms Matilla said that although it is too early to forecast the growth of this market, she believes that the big winners in 2007 will be the large distribution networks selling their own fund of fund products. The asset management arm of the Santander group, for example, recently said its hedge fund business in Spain will mainly cover fund-of-funds. “To begin with, the demand from retail investors will focus, in our opinion, on multi-strategy and multi-style funds of funds with a moderate risk profile,” said Ms Matilla. The large retail distribution networks will focus on pushing their own products to make better margins, but it is unlikely demand will be very high in the short term. To sell to its current client base – which still invests hugely in guaranteed funds – the new fund of hedge funds are expected to have a relatively low risk profile and low volatility that should satisfy conservative savers. In the private banking and institutional sectors there will be room for single strategy pure hedge funds with more aggressive and riskier investment strategies. However, this type of investor is already investing in hedge funds registered in other jurisdictions and it remains to be seen whether they find any advantages in moving money into Spain-based products. “For them it is not essential that the funds are registered in Spain, but having the managers nearby is an added advantage,” said Mr de Fernando at BBVA. “Our responsibility is to make sure the quality of the products is as good as or better than those registered elsewhere, and we are convinced we can do this.”

Matilla: multi-strategy, multi-style