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20 Billion Euro Opportunity for Spain's Onshore Funds

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MADRID, Spain (–Spain’s onshore single hedge fund and fund of funds market will be worth between 18 billion and 20 billion euro by 2010 according to a July 30 report published by Paris-based hedge fund research company Asterias. The report, titled Spain Outlook–July 2006, was based on information gathered from banking professionals, family offices, savings institutions, custodians, pension funds and fund platforms.

The report estimated that the fund of funds market will reach 8 billion to 10 billion euro and that, if BBVA’s single-manager business obtained through the acquisition of Vega AM is registered onshore, the single-manager market could reach 10 billion to 11 billion euro. There is expected to be a consequent shrinkage in the offshore market for single funds from 9 billion to 1 billion euro, although the offshore fund of funds market is seen growing to 6 billion euro from 5 billion euro.

Prior to May this year, Spain’s onshore funds were required to provide daily liquidity, and were not allowed to use leverage or borrow money, effectively closing the door to hedge funds. New legislation was introduced in May resolving these issues and opening the way for the registration of single managers and fund of funds based onshore. The first three managers were approved by Spain’s financial markets authority, the Comissi?? 1/2 n Nacional del Mercado de Valores last week, and the names of five or 10 more are expected to be announced within the next two weeks.

Under the new legislation only qualified investors can invest in single funds, with a minimum investment of 50,000 euro and a minimum of 25 investors. Single funds can invest in any kind of asset or derivative instrument and can use leverage of up to five times their capital. NAV must be calculated at least quarterly, with defined terms for adequate liquidity.

Funds of funds have no limited investment, and they are open to both qualified and retail investors. Sixty percent of the funds under management must be invested in managers registered in the OECD, including the United States, United Kingdom, the Channel Islands, British Virgin Islands and the Cayman Islands. The legislature still needs to vote on 30- to 60-day defined liquidity terms for funds of funds. For both single funds and funds of funds, investors have to sign a statement that they are aware of the risks involved.

Pension funds and insurance companies are still barred from investing in hedge funds, even if these are registered onshore.

A number of other issues still need to be overcome before hedge funds can commence domestic operations in Spain. Sophie van Stralen, founder and managing director of the research consultancy Asterias and author of the report, noted that there are still some operational issues–for example, there are still no guidelines on custody and prime broker requirements or other hedge fund services. There also is a scarcity of local skills in these areas. Some domestic applicants for hedge fund manager status say that this is a concern, according to Ms. Van Stralen.

Moreover, Ms. Van Stralen said in an interview, aspects such as redemption periods and lock-ups are yet to be decided. These issues are slated for discussion in the Spanish Parliament, which is likely to rely on the CNMV for its recommendations, in September or October. As a result, she said, the first funds of funds, which will need to have their prospectus approved by the CNMV, are only likely to be registered by the regulator towards the end of the year.

On Friday [July 27] the CNMV also specified stricter rules for advisory mandates than had previously been the case. Onshore managers that use advisers will be required to have their own risk management and product knowledge resources, rather than relying exclusively on the resources of their advisers. The regulation is designed to ensure that local providers are capable of explaining the risks of hedge fund products to their clients.

Distribution channels will include banks and asset managers for retail investors, private banks and fund platforms such as the independent Tressis and Santander’s Allfund.

The Spain Outlook–July 2006 report can be seen on the Asterias web site,

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