PLACE FINANCIÈRE & MARCHÉS — Fonds

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“Are investment funds dead?”


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The Directive on undertakings for collective investment in transferable securities (“UCITS”) is 34 years old. The Directive on alternative investment funds managers (“AIFM”) is only 8 years old. Put in perspective, these two directives perfectly illustrate the shift legislators are currently taking. 

Within the framework of these two major EU pieces of the asset management industry, Luxembourg has strategically implemented the following well-known vehicles for the alternative investment universe: the investment company in risk capital (“ SICAR ”) and the specialized investment fund (“ SIF ”). Luxembourg also recently welcomed its superstar newborn, the reserved alternative investment fund (“ RAIF ”).

So asking whether investment funds are dead seems to be an odd question, in particular if asked to an investment funds lawyer. However, if you look at how the sector has evolved over the last decades, you might come to the conclusion that this question is far from being just a teaser.

An exposure to new assets classes

There used to be a clear-cut separation between retail and professional funds. Now, a wide range of products is available to everyone. It has indeed become increasingly easier for investors from all horizons to get an exposure to alternative investment strategies, from traditional hedge funds to alternative assets like, for example, timber, vintage cars, video gaming or even cannabis (with one Silicon Valley fund, Casa Verde, being presented in a few weeks by Snoop Dogg itself at the Global Ventures Summit ).

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New alternative asset classes. Credit: Hogan Lovells

Investment funds are also not excluded from our everyday preoccupations – for example, a first vegan exchange-traded fund has begun trading on the NYSE in September 2019. Generally, investors are more and more interested in meaningful investments.

The competition with alternative investment techniques

On the one hand, funds are today competing with several innovative investment structures like coins offering, crowdfunding, investment clubs… but they do not come with their own regulatory framework. It is fair to say that some of these new very attractive investment platforms operate in a grey area from a regulatory perspective. Are tokens securities/financial instruments? Is crowdfunding constitutive of a pooled lending activity? Also, what shall be the tax treatment of those operations?

On the other hand, the rules applicable to investment funds are more stringent than they have ever been with the aim at providing investors with certainty – the certainty of acting within a regulated framework and hence, providing certain lifeguards.

One can easily imagine the performance of a portfolio exclusively invested in Apple and Amazon stocks for the last 10 years.
Simon Recher

Simon Recher,  Associate,  Hogan Lovells (Luxembourg)

A paradigm shift: from protecting investors through product to protecting investors through the manager

The UCITS Directive aimed at protecting the savings of the man on the street by offering a product that is simple and relatively safe due to the stringent requirements for risk diversification that come with it. It turned out that this protection comes at a cost, particularly a dilution of the performance. One can easily imagine the performance of a portfolio exclusively invested in Apple and Amazon stocks for the last 10 years.

Interestingly, it seems nowadays more complicated to set up a regulated alternative investment fund (which will only be marketed to professional investors i.e., investors that are able to exactly assess the risks and to understand the consequences of their investment) than a sophisticated UCITS (which can be marketed to every retail investors who have certainly never heard about the difference between an ETF and a fund focused on high yield bonds).

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Investor protection Credit: Hogan Lovells

From a supervisory perspective, the AIFM Directive has been a huge shift of how investment funds used to be apprehended by regulators as it has been construed under a different paradigm: investors shall be able to trust investment managers as long as they comply with certain rules aiming at ensuring that these firms are appropriately managed and have the proper processes in place, in particular insofar as risk management is concerned.

One could consider that the legislator must go even further.

Nowadays, investors become more and more knowledgeable about investment and everyone has access to all the financial data they need to analyze an investment opportunity.
Simon Recher

Simon Recher,  Associate,  Hogan Lovells (Luxembourg)

What’s next?

We would also take the view that the next fifty years will see another way of protection: the education and information of investors. Nowadays, investors become more and more knowledgeable about investment and everyone has access to all the financial data they need to analyze an investment opportunity. At the end of the day, is being fully informed about an investment opportunity and being able to understand it not the best protection?