Luxembourg to boom as hedge funds move onshore

By Martin de Sa'Pinto

GENEVA (Reuters) - Luxembourg could draw hedge funds in their droves as European investors retreat from offshore vehicles and seek to rein in liquidity and counterparty risk in the post-Madoff, post-Lehman environment.

To meet investor demand, managers in Europe's $300 billion hedge fund industry are eyeing Luxembourg listings for eligible funds. even though tough new European Union proposals to only allow EU-registered funds to be sold may be watered down after fierce opposition from the United Kingdom and others.

"It's more the Madoff effect than the legislation effect, funds now want to come onshore, not be dependent on the offshore market," said Martin Kloeck, a director at Zurich-based fund manager Signina Capital, which manages $600 million.

"Asset managers get the Luxembourg-regulated tag, so why wait to see what new laws might tell us to do?" said Kloeck, whose company is already moving funds to Luxembourg from Cayman.

The Grand Duchy has a multi-lingual workforce and high quality fund services, comprehensive investor protection and a vigilant but flexible regulator, said a January report by professional services firm Deloitte.

It is already drawing funds from offshore centres as major asset managers like Brevan Howard and Marshall Wace register eligible funds onshore in regulated structures like UCITS III or Specialised Investment Fund (SIF) to broaden European appeal.

"It is much easier to sell UCITS- or SIF-compliant funds, they are liquid, the strategies are transparent and they provide solid investor protection," said Salvatore Imperatore, head of London-based investment advisory Pareto Capital International.

Investors turned skittish after fraud by U.S. financiaer Bernard Madoff and the collapse of Lehman Brothers last year, and demand for transparent onshore vehicles has soared, said Hanna Duer, an associate at independent directors' group The Directors' Office.