FRANKFURT (HedgeWorld.com)--Germany's Financial Supervisory Authority has licensed Citigroup, through a newly created investment company, Citigroup Investment Deutschland Kapitalanlagegesellschaft mbH, to take on administrative, reporting and risk management requirements on behalf of hedge funds.
The license is the first the authority (Bundesanstalt fr Finanzdienstleistungsaufsicht or BaFin) has bestowed under the November 2003 Investment Modernization Act, which went into effect in January 2004 and was intended to enable the creation of hedge funds in Germany for the first time.
"Citigroup will provide fund managers, particularly hedge fund managers, a unique and efficient service by offering fund administration, custodial banking and prime brokerage services from a single banking platform," said Jim Cowles, Citigroup's head of equities in Europe, the Middle East, and Africa, in a statement.
The German law refers to a hedge fund as "an investment fund with additional risk." It allows such a fund to invest in all asset classes except for real estate or participations in real estate companies. Policy makers in Germany are concerned about a current "gray market" in unsupervised closed-end real estate funds and they don't want such funds to use a hedge fund as a means of obtaining favorable tax treatment. Another restriction is that a hedge fund's contractual terms must restrict investments in unlisted private equity to a maximum of 30% of the fund's assets. This is intended to preserve a distinction between hedge funds and private equity funds.
Citigroup's statement said that both foreign and German fund managers will be able to access the German market with minimal operational outlay through the services it has now been licensed to provide.
In June 2004, writing in the AIMA Journal, a publication of the Alternative Investment Management Association, London, Achim P
tz, a German lawyer, said that the new law has significantly improved the regulatory climate for both domestic and foreign hedge funds in Germany, but warned that several provisions of the new legislation may "prove problematic and interpretational uncertainties remain." These uncertainties include permissible marketing approaches for hedge funds to investors within Germany.
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