ALFI: UCITS and AIFs could be marketed to China within five years

19 Mar, 2014

UCITS and AIFs could be marketed to Chinese investors within the next five years, according to the chairman of the Association of the Luxembourg Fund Industry (ALFI).

“China has signed a cooperation agreement with the European Securities and Markets Authority (ESMA), so in 2015 when the AIFMD passport is made available to non-EU managers, it could be possible for Chinese AIFMs to market to European institutional investors. It would be then only normal for our European AIFs to be allowed for distribution to Chinese institutional investors,” said Marc Saluzzi, chairman of ALFI, speaking at the ALFI Spring Conference in Luxembourg.

The marketing of straight UCITS and AIFs into China is strictly forbidden at present unless they qualify under the Qualified Domestic Institutional Investor (QDII) regime. QDII, despite being around for almost 10 years, has proven to be a disappointment with very little investor interest.

 “I am confident that UCITS and AIFMs could be marketed into China within the next five years. While I doubt the Chinese government would permit these firms to market to retail in the near future, they might allow them to distribute to institutional investors first, which would be a huge step forward,” he added.

China is slowly warming to foreign asset managers. In 2013, the Shanghai regulator allowed a limited number of hedge funds to market to the city’s high net worth investor community through its Qualified Domestic Limited Partner (QDLP) programme.  Six hedge funds – Canyon Partners, Citadel, Man Group, Oaktree, Winton Capital and Och-Ziff – have secured approval from the Shanghai regulator to raise capital on the mainland. The regulator has given these hedge funds an overall quota of $300 million to manage, which will be split six ways.

There are a number of inhibitors to the development of a hedge fund and asset management industry in China though. Perhaps the most significant impediment is whether or not the central government in Beijing actually permits the growth of an alternatives industry, while other fundamental issues include stringent limits on the securities hedge funds can short, as well as capital controls.

Hedge funds hoping to market into China through QLDP can go direct to high net worth individuals (HNWIs), engage third party marketers or enter into distribution agreements with securities companies, fund managers or banks. This will require hedge funds to conduct operational due diligence on their partners, and will certainly not be cheap. While banks are a powerful source of distribution to the mainland’s burgeoning HNWIs, the commissions they charge could eat into hedge funds’ management fees.

Another challenge facing UCITS and AIFMs in Asia more broadly is the passage of the ASEAN fast track system for Collective Investment Schemes (CIS). The Thai regulator – the Securities and Exchange Commission – recently paved the way for such vehicles to be marketed to retail investors. Singapore’s Monetary Authority Service (MAS) also said CIS vehicles could be offered in the city state via a fast-track process as Asian allocators increasingly look beyond UCITS. “We obviously welcome the competition,” commented Saluzzi.

Nevertheless, an ASEAN passport is not without its challenges particularly given the diversity among its 10 member states. Many are at varying levels of economic and regulatory development, which could hinder progress.  It is also improbable a uniform passport system will emerge anytime soon.