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Survey Finds Room for Growth in Italian HF Industry

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LONDON (–A new survey by the Alternative Investment Management Association found that Italy’s hedge fund industry is poised for growth, and that a combination of skill development by managers and entrepreneurial development encouraged by regulatory changes could move the market forward.

Italy’s hedge fund industry remains small, just 25.1 billion euro ($21.9 billion) as of May 31 in an industry that’s estimated to have $1.2 trillion in assets worldwide. But Italy’s hedge fund asset figure is nearly 10 billion euro more than it had at the end of January, according to AIMA’s figures, and more than double the estimated size of Italian hedge fund investments a year ago. That growth was one of the factors that prompted AIMA to take the Italian hedge fund industry’s temperature via this survey.

AIMA sent the questionnaire out to all so-called speculative mutual funds–or speculative SGRs, based on the Italian term for traditional mutual funds, “Societ?? 1/2 di Gestione del Risparmio”–that are authorized by Italian regulators. The response rate was 74%, according to AIMA, and the responses comprised 82% of all hedge fund assets managed in Italy. Thus the survey results carry some weight, at least in terms of the issues on which there was clear consensus, and there were a few.

Near the top of the list of issues was a desire to change the face of the hedge fund industry in Italy. Currently 97% of Italian hedge fund assets are invested with funds of funds, while only 3% are invested with single managers. Most survey participants viewed this with dismay, considering it a kind of domestic shortcoming. The perceived causes for this imbalance ranged from a lack of good domestic single fund managers (a symptom with its own causes) to cultural risk aversion to high fees.

The lack of qualified domestic hedge fund managers was seen by the survey participants as a hindrance to attracting the kind of institutional offshore capital that would promote more managers to enter the space, thus attracting more capital. “The companies note the lack of ‘quality’ newcomers to the Italian marketplace in terms of expertise,” according to the survey. “This inevitably limits competition in the market. The increase of onshore ability and skills would, in fact, enable the increase in interest from foreign markets which in turn would promote the entry of new independent managers. Moreover, the increase of Italian specialized knowledge would contribute to the reduction of dependency on non-Italian managers.”

The survey participants cited a number of factors contributing to the dearth of single managers, among them “onerous establishment costs” for hedge funds, a “benchmark culture” that has limited manager creativity, and the difficulty writing legislation that deals effectively with the relationships between administrators, managers and prime brokers.

Italian law also provides for a limit of 200 investors per fund, which has led to a proliferation of “clone” funds which replicate those that have reached their 200-investor limit. These clone funds add to hedge funds’ administrative costs and their share classes often carry higher fees than the original funds. According to the survey, participants think the number of investors allowed in a fund should be decided by the managers.

Additionally the survey participants said they would like to see 500,000-euro minimum investment thresholds done away with for funds of funds and thresholds be lowered for single-manager funds. “?? 1/2 [T]heir view is that ?? 1/2 a high investment threshold does not guarantee that the client is diversifying its investment,” according to the survey.

There was also agreement among the survey participants that changes need to be made to both the structure and language of Italian law governing hedge funds. In terms of structure, current law treats both single fund managers and funds of funds the same way with respect to investment thresholds. Survey participants said they believed separate regulatory regimes for single managers and funds of funds would work better, with lower investment thresholds for funds of funds.

The language in the laws should also be changed to de-emphasize the speculative nature of hedge funds and emphasize the “hedging.”

According to AIMA, the survey in general found opportunities to move the Italian hedge fund market forward by further developing onshore managers’ skills and enhancing the entrepreneurial climate.

“Italy has been one of the pioneers of the European hedge fund industry and it has created a structure that meets investor transparency and regulatory need,” said Emma Mugridge, AIMA’s director, in a statement. “This survey has identified some of the issues that it now needs to address before it can move on with its market development. None of the findings of the survey are impossible to address and we hope this survey will act as a stimulus for renewed dialogue and, ultimately, change and future development.”

The full survey can be found here on AIMA’s website.

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Contact Bob Keane with questions or comments at [email protected].


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