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Switzerland-based Investors Increase Hedge Fund Exposure despite New Regulation – March 2014

by David Corrigan

  • 31 Mar 2014
  • HF

Investors based in Switzerland have historically been keen investors in hedge funds with traditionally lax regulation when it came to investing. In March 2013, the Collective Investment Schemes Act (CISA) was passed in order to regulate the fund management industry, placing some restrictions on the distribution of hedge funds. Funds based outside of Switzerland, or “foreign funds”, will need to appoint a representative and paying agent within Switzerland in order to distribute their fund to qualified investors by March 2015. Despite the increased regulation, CISA may be a positive step for funds in Switzerland and it will also help in its alignment to the European Union’s AIFMD.

Preqin’s Hedge Fund Investor Profiles online service currently tracks 218 institutional investors based in Switzerland that are actively investing in hedge funds. Of these investors, fund of hedge funds managers are the most prominent investor type, accounting for 30% of the investor base. Interestingly, wealth managers constitute 20% of the Swiss hedge fund investor base, in contrast to 7% of the wider investor universe, highlighting the importance of the private wealth industry to hedge funds in Switzerland. This is further shown by family offices being the next most prominent group of investors, with these firms representing 15% of Swiss investors. Managers can capitalize on this and by targeting private wealth institutions it is possible for them to gain access to a larger pool of investors through discretionary mandates held by private wealth managers. BK & Associates is one wealth manager expecting to be active in hedge funds over the coming year; the Zurich-based firm is looking to allocate to as many as four hedge funds across various strategies.

In terms of strategy preferences, long/short equity is most favoured, with 63% of Swiss investors interested in the strategy. Macro funds and CTAs also remain prominent, despite lacklustre performance in 2013, with 49% and 43% of investors maintaining a preference for these funds respectively. Investing directly is the most common method of investment with 41% of Swiss investors investing solely through single manager funds; 28% of investors invest solely through funds of hedge funds, with 31% investing through a combination of the two methods. A quarter of Swiss-based investors include a preference for UCITS-compliant hedge fund structures, showing that there is a degree of appetite for regulated vehicles.

Swiss investors look set to continue to be important to the hedge fund industry over the next few years. The introduction of CISA comes at a time when investors have a growing confidence in the hedge fund space. Between December 2012 and March 2014, the average hedge fund allocation of a Switzerland-based investor increased from 6.3% to 10.5%. In addition, Hedge Fund Investor Profiles shows that 26% of Swiss investors are looking to commit fresh capital to hedge funds over the next 12 months. The regulation could promote investor confidence in the space, providing an opportunity for fund managers who are pro-active in courting investors once the regulation comes into full effect.

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