AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Spain: a burgeoning market for hedge funds

Anderson C. Dearing and Gemma Faura Santasusana

Asterias

Q4 2007

In Spain, a new onshore hedge fund regulation went into effect in May 2006, allowing managers to prepare to launch new onshore products. An update to this regulation, Real Decreto 362/2007, published on 17 March 2007, includes the final text needed to officially launch and market new products.

The Spanish asset management market is small when compared with others in Europe; ninety-five companies manage €262 billion of assets (equivalent to 25 percent of the French market). The most popular investment vehicles in Spain have a low risk profile. These include guaranteed products (26.5 percent of assets), fixed income products (22.9 percent of assets) and money market funds (22.2 percent of assets). In addition, the Spanish market is highly concentrated; out of the ninety-five asset management firms, the four largest – Santander Gestion Activos, BBVA Gestion, Invercaixa Gestion and AhorroCorp.Gestion – account for 51.2 percent of the country’s total assets under management.

We met with several asset managers and service providers in carrying out our market study (Spain Outlook 2007) and noticed that the Spanish market is booming with over twenty-five funds launched in the first half of 2007, on the heels of seven funds launched in November and December 2006 (fig.1).


As of the end of June 2007:

 

Asset management companies
registered with the CNMV
22
Single-manager funds registered
10

 

New fund vehicles

The new Spanish regulation outlines how to set up and distribute hedge funds in Spain and creates the following two types of investment vehicles:
• Free investment alternative collective investment schemes (CISs) for single manager hedge funds, called Instituciones de Inversión Colectiva de Inversión Libre; and
• Funds of free investment CISs, or funds of hedge funds, called Instituciones de Inversión Colectiva de Instituciones de Inversión Colectiva de Inversión Libre.

New regulated asset management firms
 

The new regulation sets forth specific requirements for firms managing hedge funds. These firms must declare that they conduct this business and obtain authorisation from the Spanish securities market regulator, the CNMV. However, they do not need to set up a separate company to manage CISs or alternative CISs.


Jose Pascual, lawyer for SJ Berwin, in Madrid explains that the process for agreement of funds is quick; between two weeks and one month when the request is filed.


Ricardo de Seixas, Managing Director of Siitnedif comments, “They (the new regulations) are certainly suitable for our strategies, although the leverage cap of five times assets could be too tight for some strategies. Apart from that, there are a few differences between the regulations and the standard rules already out there on how business is conducted, like high-water marks and performance fees, for example.” Jose-Maria Amusategui, Founding Partner and President of Cygnus Asset Management adds, “The new single manager regulation gives fund managers as much flexibility in managing single strategy funds as they would have anywhere else.” This is largely because the CNMV worked closely with the domestic asset management industry when drafting the new regulation. Mr. Amusategui notes: “We hear about proprietary traders and portfolio managers who are thinking about leaving their current jobs at institutions and setting up their own funds. We also see managers from other countries interested in Spain as a possible place to set up operations. So we are probably going to see more new fund managers than initially expected.” Jose Pascual confirms this.


Gema Montoya, Executive Director of Santander Investments, adds, “Spain has only seen the launch of onshore hedge funds late last year. While there is a strong interest specially coming from asset managers in widening their product offer, a number of regulations are still pending to better define the product. We forecast that there will be a progressive growth as the interest is there.”


Other strong points about the new regulation are that it opens hedge funds to retail and institutional investors that the €50,000 minimum investment for single manager funds is one of the lowest in Europe and that liquidity terms for funds of funds are in line with hedge fund specifications.


On the other hand, the barriers to entry for foreign players are high (due to legal costs to set up a local infrastructure, etc.) and domestic hedge fund management and marketing skills are scarce.


The Spanish hedge fund market today

As at 17 July 2007, there are thirty-five Spanish onshore hedge funds registered with the CNMV.


Twenty-five of these are funds of funds and are managed by twenty companies.


There have been ten single manager funds registered with the CNMV to date and six companies manage these. At this time, there are no foreign players.


Funds of funds represent approximately 75 percent of the assets under management.
 


Third-party administrators and prime brokers
 

Spanish custodian banks are in the process of developing hedge fund services. However, they are entering unknown territory. Santander Investment and Sabadell are the top players in traditional asset management and they are building their hedge fund skills.

Gema Montoya, Executive Director of Santander Investments sees clear opportunities for service providers, asset managers, network distributors, fund administrator and depository services.


Thirteen funds use non-Spanish custodians. Nine of these contracted with the first foreigner to arrive on the market, BNP Paribas Securities Services. Foreign custodians are poised to grow their market share rapidly because they have been refining their hedge fund skills in other European regulated markets. Other foreign custodians operating in Spain are Barclays Bank, RBC Dexia IS and UBS. Deutsche Bank and Morgan Stanley are the first prime brokers to serve Spanish single manager hedge funds.

Evolution of the demand
 

We foresee that the Spanish market will open to new funds slowly. Returns and liquidity are the two main issues for new hedge fund investments. Funds of funds are likely to dominate initially, in terms of assets raised, as they did in Italy and France when those markets first opened.


Carlos Dexeus, Chairman of Altex Partners does not expect to see a surge of single manager funds, over funds of funds; although he does anticipate growth in the overall hedge fund market. He remarks, “I imagine that within three years, they (hedge funds) will have become another asset class alongside equity, bonds and traditional investment funds.”


Meanwhile, Ricardo de Seixas confirms, “Since most Spanish investors do not have a lot of experience in investing in hedge funds, fund managers will probably turn to strategies using moderate leverage, which the regulations cap at five times assets”. He predicts: “I think the market will welcome the mass product – funds of hedge funds – and with time and as more funds are available, smaller investors will warm to single manager funds - especially, as investors see the returns these funds can generate if/or when the equity markets go through another correction.”
Finally, the big fund platforms in Spain are developing specific access to funds of funds, to enhance their product offering. They are organising product presentations to intermediaries and large investors, to help them get familiar with allocations in hedge funds.

Conclusion
 

As in Italy in 2000, foreign companies are entering the market as advisers, packaging funds of funds for fund distributors. We are at a very early stage of investments and remain cautious on the development of the demand from end investors. Given today’s volatile equity markets, lower fixed income returns and signs of falling real estate prices, Spanish investors need to diversify the risk/return elements of their portfolio.

 

Appendix Data

 

Requirements for single manager funds

Minimum investment
€50,000
Minimum number of investors
25
Target investors
Qualified, with possible lock-up periods
Underlying securities
All assets and derivative instruments
Leverage
Up to 5 times assets
NAV calculation
At least quarterly, with defined liquidity terms - Redemption must be paid within a period equal to twice the NAV calculation period, starting on the first NAV publication date after the redemption “pre-order” and at the latest 9 months after the “pre-order”.
Other requirements
Risk management and stress testing and the fund must be registered as an alternative CIS with the CNMV
Investor protection
Before subscription, investors must sign a statement that they are aware of the risks involved

 

Requirements for funds of funds

Minimum investment
Nil
Minimum number of investors
Nil
Target investors
Qualified and retail
Underlying assets
60% of the portfolio must be invested in:
- Alternative CISs;
- Similar foreign CISs domiciled in OECD countries; or
- Similar foreign CISs not domiciled in an OECD country but managed by a company domiciled and regulated in an OECD country
Maximum of 10% in any one fund
Approved domiciliation
For fund managers based in OECD countries: Ireland, Luxemburg, France, Italy, UK Channel Islands, Cayman Islands and British Virgin Islands
NAV calculation
Lock-up periods are authorised if disclosed in the prospectus.  Redemption must be paid within a period equal to twice the NAV calculation period, starting on the first NAV publication date after the redemption “pre-order” and at the latest 6 months after the order
Other requirements
Fund must be registered with the CNMV and the prospectus must include investment objectives, specific risks and investor profiles
Investor protection
Before subscription, investors must sign a statement that they are aware of the risks involved

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