tax and jurisdiction
Germany is to allow the sale and marketing of hedge funds from the start of next January. This is expected to open the door to some E150bn in new assets from local investors over the next three years.
Laws preventing hedge funds from setting up in Germany and imposing heavy taxes on profits made from investments in offshore alternative products have stunted local investment in the asset class so far.
At the moment, hedge funds cannot set up or market in Germany. It is not prohibited for sophisticated investors to purchase hedge funds, but tax laws make it a somewhat self-defeating choice. Tax is levied at 90% on the increase in value of the holding, calculated between the fund's purchase price and its value at the end of the tax year in question, if the investor sells the fund within one year.
There is a minimum tax of 10% of the redemption price or price at the end of the fiscal year, which can be levied without sale of the underlying shares in hedge funds, and also on shares of funds that have lost money.
The new regulations for selling hedge funds are expected to be modelled on Swiss rules.
German institutional invest- ors will be able to invest in foreign and domestic single strategy hedge funds and funds of funds. Retail investors will be restricted to funds of funds only.
There is huge scope for growth in Germany's hedge fund market, according to Matthias Knab of third-party marketer, Opalesque.
Retail investments in other alternatives products began in Germany just over two years ago and over that time period investors have committed more than E3.5bn.
Italy may be a model for how the German hedge fund industry expands, Knab said.
A similar hedge fund ban in Italy was lifted in 1999 and there are now around 21 alternative asset management companies and 50 registered hedge funds.
German institutional invest- ors currently have about 0.5% of their investments in alternative assets and there is potential for this to rise to 5% to 10% within three years, according to experts.
Some German banks ' including Commerzbank and Deutsche ' have issued certificates that mirror the performance of an underlying basket of hedge funds.
But German institutional investors have placed only about E5bn in hedge funds, compared with E123bn in the foreign fund market.
Regulations exist within the German Finance Ministry's proposals designed to protect investors, including a total loss warning in the hedge fund prospectuses plus aids to transparency.
German hedge funds would also have to notify the financial market supervisory authority of any short sales. By loosening hedge fund regulation the German government hopes to stem the exodus of fund managers to less restrictive locations such as Ireland or Luxembourg.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected