EY Luxembourg has just released its 2017 edition of Investment Funds in Luxembourg – A technical guide, designed to answer many questions on setting up and operating investment funds in Luxembourg. The 2017 publication has been updated to cover recent legislative and regulatory changes. 

The investment funds industry continues to be presented with both significant opportunities and challenges.

The industry is expected to generate a relatively modest growth rate of around 4-5% in assets under management over the next 4-5 years. This growth will be primarily driven by the ever increasing need for long-term savings due to changes in demographics, greater  financial responsibility being placed on the individual to be responsible for their future pension and other savings requirements, the continued rise of the middle class in emerging countries along with their related increased demand for more sophisticated savings products, the need for asset management expertise during both the accumulation and decumulation life phases and asset owners diversifying assets in the search for yield in an expected medium-term low interest environment.

Alongside these drivers there are also a number of significant detractors to growth. These include certain asset owners increasingly moving to manage more assets internally, the withdrawal of significant assets by the sovereign wealth funds, the draw down of defined benefit assets which are not being replaced at the same pace by defined contribution schemes along with very low savings habits of younger generations.

Apart from the factors which will influence growth over the coming years, the industry is facing a number of specific challenges including:

Fee compression and operating margin decline
The asset management industry is currently experiencing significant fee compression and will continue to do so over the next three to five years. This fee compression is driven by continued flows into passive strategies where price is becoming an ever increasing factor in investors decision-making.  Apart from pricing considerations, these passive flows are influenced by increased questioning by various stakeholders including regulators and policy makers of active management performance versus compensation models.  Therefore, notwithstanding that assets under management will grow, margins will decline. These lower margins will drive further consolidation at all levels within the industry in addition to forcing the industry to reduce its cost base through review and redefinition of its operating models.

Value for money and the impact to active management
As mentioned above all stakeholders including regulators and investors are placing asset managers under much greater scrutiny when it comes to performance versus compensation models.  While the traditional standard of risk-adjusted net returns is still important, there is much greater focus on “outcomes” and whether these are in line with investor requirements. Asset managers will need to place greater focus on the end investors’ needs and move away from being product providers to solution providers, with the real challenge being how to deliver these in a scalable way. Transparency, clarity and simplification – and at all times doing what is best for your customer in a way that is clearly understood – will be an important part of the new mantra to redefine value with an ultimate focus on financial well-being of the customer.  

Digital and new technologies 
Emerging technologies are disrupting every aspect of the asset management value chain and challenging asset managers to adapt. For the most agile players, these challenges will provide the opportunity to innovate ahead of the competition, and often in a more cost-effective way.

Digital and new technologies will transform the distribution landscape over the coming years. The industry as a whole will see the continued rise of execution only services, alongside advice platforms with existing players shifting towards more sophisticated wealth management. Alternative data, analytics and artificial intelligence will be used by asset managers to further enhance their traditional data and tools. Robotic technology will be used across the value chain to deal with high volume, high data intensive, and ‘prone to errors’ processes in order to improve overall operational efficiency. This will enable organizations to have a low cost virtual workforce which is able to work 24 hours a day, is scalable and performs with 100% accuracy, freeing up staff to work on higher value-add activities.

Implementing the regulatory agenda
The challenges around implementing the regulatory agenda have not gone away. This is further complicated by the current geopolitical situation across the global by events such as Brexit and the new US administration. In the US, the new administration is undertaking a wholesale review of post-crisis financial regulations while here in Europe we are dealing with the immediate implementation of MiFID II and the fall-out of Brexit.  

Given these uncertainties, we will no doubt see changes in the global regulatory environment over the coming years which will necessitate the building of operating models so that they can be flexed to fit the changes as they occur.

Investment Funds in Luxembourg – A technical guide may be downloaded here.


In response to recent political and macro-economic developments, the Association of the Luxembourg Fund Industry (ALFI) has announced a series of initiatives to support asset managers and investment funds in fulfilling their role of serving investors and fostering economic growth. The main focus of these actions will be the potentially disruptive consequences of Brexit, technology, investor education, operational efficiency and cost management.
In the first edition of its 2020 Ambition paper, defined in 2015, ALFI had identified eleven ‘global macro-drivers’ that continue to represent major challenges for the international fund and asset management industry.
“Since then, some of these factors have materialised in concrete, sometimes unexpected ways or had an even more profound impact on business models, products and strategies than expected”, says ALFI chairman Denise Voss. “Thus, ALFI decided to reinvigorate its initial Ambition paper by adding new initiatives in various areas.”
All ‘global macro-drivers’ identified in 2015 have proven to be accurate, namely:

  • Protectionism, with developments such as Brexit creating a growing risk of barriers, however harmful this may be for citizens and investors;
  • Growing public sector pension liabilities due to demographic developments, reinforcing the need for individuals to assume more responsibility for their own financial well-being, including ensuring adequate retirement income;
  • The quest for return in an environment of persistently low or even negative interest rates; and
  • Shift in investment strategies favouring not only capital flows to passive investment vehicles and ETFs, but also towards responsible investing and impact investing.

The trend to seal off national markets from international competition could impact economic growth in general and the fund industry’s cross-border distribution models in particular.
The stricter scrutiny of financial services as a result of the 2008 financial crisis has made sound governance, regulatory and business compliance basic requirements for all industry players, emphasising the advantage of choosing well-regulated fund centres such as Luxembourg. To that end, the tried and tested delegation model has functioned well in the Luxembourg fund centre over the last three decades, giving European and non-European investors in funds access to expert portfolio management.
Increasing costs of regulatory compliance as well as increasing strain on margins arising from the proliferation of ETFs will continue to put pressure on asset managers to improve operational efficiency, enhance productivity and reduce costs.
To support its members in meeting these challenges, ALFI is reinforcing its strong commitment to support the EU Commission’s Capital Markets Union (CMU) initiative. By encouraging greater cross-border distribution of investment funds and facilitating personal savings to secure adequate revenues for retirement, the CMU action plan is indeed tackling several of the challenges identified by ALFI.
In this context, ALFI will intensify its efforts to articulate the essential role of investment funds for the global economy that extends from building savings and funding pensions to financing innovation and infrastructure or achieving social impact. ALFI will namely actively work on the implementation of the EU’s proposal for a pan-European personal pension product (PEPP), as Luxembourg’s long experience in cross-border fund distribution will position it as a hub for European PEPP providers.
Regarding savings and personal pensions, ALFI also intends to step up its efforts related to investor education and will soon launch a fundamentally revised version of its trilingual online platform
Building on its success in Australia, which gives institutional investors easier access to Luxembourg UCITS, ALFI is stepping up efforts in Latin America, China, South-East Asia and other regions with the aim to connect investors with worldwide market opportunities.
ALFI and its Digital/FinTech Forum will intensify their efforts to raise awareness, identify the challenges and develop the opportunities inherent in Blockchain, Big Data and new digital technologies to innovate in service delivery, operational efficiencies and better address the next generation of investors by enhancing the customer experience.
Last but not least, linked to its objective to stimulate innovation, research, education and talent development, ALFI is sponsoring a four-year project with the University of Luxembourg to create a database of Luxembourg investment funds. Modelled on a similar database of US mutual funds, it will lay the groundwork for academic research benefitting the industry and its stakeholders.
Together with the Luxembourg House of Training, the Association will aim to continue to adapt its professional training programs and workshops, as well as e-learning solutions, to a constantly evolving demand from industry professionals to broaden and deepen the talent pool in Luxembourg and abroad.

Full details of ALFI’s 2020 Ambition mid-term report can be found here.


Man Group has announced that it has become a signatory to the United Nations-supported Principles for Responsible Investment (PRI). Two of Man Group’s investment businesses, discretionary manager Man GLG and systematic equity manager Man Numeric, have been signatories to the PRI since 2012 and 2014, respectively. The firm is now elevating its commitment to the Man Group level, implementing the Principles across its five investment businesses – Man AHL, Man Numeric, Man GLG, Man FRM and Man Global Private Markets – that collectively manage $95.9bn in client assets.  
Founded in 2005, the PRI is a global network for investors committed to integrating environmental, social and corporate governance (ESG) considerations into their investment practices, ownership policies and business strategies. The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.
Luke Ellis, Chief Executive Officer, Man Group, said: “As we continue to develop our responsible investment capabilities and offering, we are delighted to elevate the UN-supported Principles for Responsible Investment to the Man Group level. Consideration of environmental, social and governance factors is increasingly a priority for our clients globally, and as we manage our investors’ capital we are committed to supporting their values and aims across our firm.”
Fiona Reynolds, Managing Director, PRI said: “Over the last few years, Man Group has demonstrated a strong commitment to responsible investment. It’s a great credit to them that they are now taking this commitment to the next level. This move sends a positive signal to others in the alternative investment space, whom we hope will follow Man Group’s lead.”
In June 2017, Man Group appointed Steven Desmyter as Head of Responsible Investment and Chair of Man Group’s Responsible Investment Committee, and Jason Mitchell as its Sustainability Strategist. Desmyter and Mitchell will each be presenting at PRI in Person, the global responsible investment conference, taking place in Berlin on 25-27 September.


Stone Harbor Investment Partners LP, the global fixed-income investment firm focused on credit and asset allocation strategies, has announced its commitment to comply with the £217 billion Local Government Pension Scheme’s (LGPS) Code of Transparency.
The voluntary code, launched by the LGPS Advisory Board in June 2017, is aimed at helping LGPS funds access detailed information surrounding costs and fees in order to help to report costs transparently.
“Signing up to LGPS Transparency Code was an important step for Stone Harbor and one that further showcases our commitment to providing our LGPS clients with full portfolio and cost transparency.” said Michael Casagranda, Client Relationship Manager at Stone Harbor.
“Stone Harbor has been working with LGPS clients since 2007, and we are fully supportive of the Code’s imperative, which seeks to provide more clear and consistent cost reporting” Casagranda added.

He also said, that “whilst the code is specifically for LGPS clients, we expect its impact will be felt across the entire pensions industry.”


Lorna Smith, Interim Executive Director of BVI Finance, has made a statement on Hurricane Maria and the impact on BVI’s international business and finance centre.

“The full impact of Hurricane Maria is still emerging, but thankfully we were spared the brunt of it as the eye passed south of our islands. Reconstruction efforts have therefore continued along with ongoing humanitarian support.
For the international business and finance centre, Hurricane Maria caused minimal disruption with many firms able to continue providing key services to clients throughout. This is thanks to the successful implementation of business continuity plans, which includes many firms partnering with their international networks on an interim basis. Importantly, the company register continues to function via the online portal, VIRRGIN. Furthermore, having temporarily relocated to Castries, St Lucia, the Commercial Division of the High Court remains scheduled to start hearing matters on Monday 25th September.
In such circumstances I remain incredibly grateful to the private sector for their herculean efforts to support the BVI through this critical phase and in their commitments to the future.
Looking forward, with the support of key partners including the Governments of the BVI and UK, the BVI’s international business and finance centre – which mediates over US$1.5 trillion of investment globally – will return to normalcy. Fundamentally, despite recent events the BVI remains open for business now and for the future.”


The hedge fund industry has produced its tenth consecutive month of aggregate gains in August, though leading strategies shifted a bit during the month, according to the latest Hedge Fund Performance Report [PDF] from eVestment.

A welcome sight for investors is an accelerating rebound from the largest managed futures products, and macro funds are also improving on what was a dismal Q2. Quantitative equity strategies outperformed in a generally mediocre developed equity environment, and long/short equity strategies continued to grind out positive performance. While we know month-to-month sentiment shifts are ultimately not what matters, for what was not a blow-out month for the industry, August’s returns felt like pretty good news.


  • Hedge funds returned an average of +0.74% in August, and are +5.47% YTD in 2017.
  • Three-quarters of the industry is positive in 2017, and average gains are near 10%.
  • Emerging markets’ run of elevated outperformance continues, again led by Brazil in August.
  • The largest managed futures funds posted their best month in August since the BREXIT-dominated June 2016.

Hedge funds returned an average of +0.74% in August 2017. Year-to-date the industry is +5.47%, with three quarters of all strategies in positive territory. Equity exposure continued to support returns, while managed futures funds are rebounding.

Key points
Aggregate returns may under-represent opportunity available in hedge fund space in 2017. With 75% of products producing positive returns in 2017, and the average return from those products near 10%, aggregate returns near 5.5% are likely a poor universal representation of investor experience in 2017.

Despite strong headline returns, there is disruption among activists positions which continued in August. Aggregate returns from activists were negative in August, the first month since October 2016 when returns have been even close to negative territory. The universe is still the second best performing non-EM strategy in 2017, but only half of reporting activists were positive in August, and each fund which was negative in August, also produced losses in July.

Managed futures’ rebound accelerated in August, led by the largest funds. During a month where developed market equities were not among the best performing segments, where there were large moves in metals/energy commodity markets, and treasury/sovereign bond markets, managed futures products excelled. For large managed futures funds, August’s market shifts enabled their largest gains since June 2016, and the market shocking BREXIT vote. August’s returns move the largest managed futures funds back into aggregate positive territory for 2017.

Quantitative equity strategies excelled in developed markets’ mediocre month. Despite the relatively low returns for US and European markets in August, relative to their recent past, quant equity funds were able to produce outsized returns, perhaps aided by the spikes in volatility. Whatever the exact reason, that quant approaches were able to outperform provides further support for the approach.

Led Again by Brazil in August, EM Outperformance Continues into Eighth Month of 2017
Emerging market strategies again produced returns more than double that of developed market strategies in August, resulting in YTD returns that are nearly three times that of their developed market-focused peers.

Primary Regional Exposure
With two strong consecutive months of returns, Brazil exposure is creeping up on China and India as industry leading return generators. No other segment has outperformed exposure to Brazil in the last three months, and after leading the industry in 2016, Brazil-focused funds are within striking distance of 2017 China and India fund performance.

Economic Development
Emerging market skew supporting Latin America- and Hong Kong-domiciled funds’ industry outperformance. Firms domiciled in Asia have been generating superior aggregate returns in 2017, outperforming products offered by managers located in the UK, US, and continental Europe. The higher proportion of EM strategies in Asia and Latin America is the primary source of this outperformance.


Markets have been little moved by the escalation of the North Korean conflict, claims Diana Choyleva in the latest Enodo Weekly from Enodo Economics. They may well be right that short of a nuclear war, in which case all bets are off, Kim Jong-un’s provocations are unlikely to have an immediate material impact. But, together with China’s relentless rise, these are tectonic shifts in the global political order. They argue for an increase in equity risk premiums to levels not seen since the Cold War.

As I write this Weekly, a vivid memory has come to my mind. I see myself, age 11, sitting in our kitchen in Communist Sofia with my English tutor doing a dictation and feeling proud that I got the phrase “nuclear disarmament” right.

Since then, the main nuclear weapon states – France, China, Russia, UK and US – have reduced their arsenals from over 70,000 warheads at the height of the Cold War to around 14,900 today. The three other nuclear weapon states – India, Israel and Pakistan – have not joined the Treaty on the Non-Proliferation of Nuclear Weapons and have been increasing their arsenals.

With its sixth test explosion of a nuclear device on September 3rd it looks like North Korea has now also joined the club.

Experts will make their final assessment after careful analysis of the data. But in any case, the impact of the test, which generated explosive power 10 times greater than the Hiroshima bomb, confirms that North Korea can flatten whole cities. And with its recent intercontinental ballistic missile tests suggesting that the US mainland is in reach, Kim Jong-un has all but achieved his aim of deterring the US from attempting to change North Korea’s regime or leadership.

America’s war in Iraq and its military strategy in Syria, where America was unwilling to commit troops on the ground, have convinced Kim that the best route to secure his hold on power is to deter the US with nuclear weapons. He will not stop short of America accepting that North Korea is indeed a nuclear power.

The unexpected speed at which North Korea has developed a nuclear capability makes the likelihood of a military conflict low. It remains uncertain whether Pyongyang can successfully fit the nuclear devices on intercontinental ballistic missiles, but Washington is unlikely to want to risk finding out the hard way.

While it is unclear whether North Korean missiles are accurate enough to hit the US, they can definitely strike China with much greater precision. North Korea under Kim Jong-un was and is much more of a problem for China than it is for America.

China does not get on well with powerful neighbours, even so-called fraternal ones. She is wary of them, for good reasons, and they of her. Vietnam is the perfect example. Having supported North Vietnam for so many years with war supplies, food and fuel, China found herself at the receiving end of Vietnamese territorial aggrandisement and had to fight a war against this former brother in 1979 to stop the Vietnamese advance.

China shares a land border with North Korea. The old imperial capital of the Kingdom of Koreana is now part of China and the Chinese government has always expected the Koreans to try to reclaim it at some point. It is not in China’s interest to have a nuclear North Korea.

But it is also not in China’s interest to have a unified, powerful, democratic Korea that is at the beck and call of the US. South Korea is already armed with the THAAD missile defence system as well as super radars that can track the whole of Manchuria including the Chinese capital and beyond.

Beijing does not trust Kim any more than Washington does. In fact, the relationship is on ice. The North Korean leader acted swiftly and mercilessly when he killed family members – his uncle Jang Song Thaek in 2013 and his elder half-brother Kim Jong Nam in 2017 – who he believed had conspired with Beijing to oust him.

Clearly, Beijing’s leadership has no sway with Kim, who sees his nuclear success as not only deterring the US from effecting a regime change but also deterring China from effecting a leadership change. What is far from clear is China’s real capability for successful subversive action in North Korea. North Korea is China’s problem but can it tackle it, even with time?

Worse still for Beijing, if the US establishes bilateral diplomatic relations with North Korea and accepts Pyongyang holding some nuclear weapons under a strict agreement, Japan and South Korea will feel the heat and will likely decide to go nuclear as well.

The global political order is set to change irrevocably. Pyongyang has played the US and China against each other successfully so far, to the detriment of China more than America. This will only serve to strengthen Beijing’s determination to become the dominant regional and eventually global power.

In coming years, global markets will have yet again to learn to live with the uncertainty of the “unknown unknowns” that characterised the Cold War.


Geopolitics has now become the number one concern of global institutional investors, eclipsing their fear of rising interest rates or economic slowdown, according to a recent study conducted by Allianz Global Investors (AllianzGI).
For the first time since the AllianzGI RiskMonitor study was launched globally in 2013, geopolitical concerns top the list of risk factors for the 755 institutional investors surveyed, who represent $34.2 trillion in AUM across North America, Europe and Asia-Pacific.
Of the global investors surveyed, 44% say that geopolitics represent a major risk to investment performance – ahead of a global economic slowdown (41%) and rising interest rates (32%).
Neil Dwane, Global Strategist at AllianzGI, said: “This study highlights the extent to which geopolitical uncertainty, including the ongoing tension in North Korea, which has only increased since we conducted our survey, is weighing on investment decisions. Financial markets have never operated in a vacuum, but geopolitics now appears to be having a greater impact than at any point in recent memory on how global investors are behaving.
“Add into the mix that 31% of investors also told us that US politics is an investment concern, and it becomes clear that politics is really piling pressure on markets. As a result, investors are increasing their focus on risk management and downgrading their return expectations as they struggle with a risk-return conundrum, despite the recent strong run in equity markets. The question on investors’ minds is whether markets have priced in all of the risks.
“With yields globally still repressed, it is only by taking risk that investors can earn some return. But they want to be confident that they can react quickly to any recalibration of assets, and capture any opportunities while optimizing their downside protection.”
Event risk and equity market risk have also risen sharply up institutional investors’ agenda over the last 12 months:

  • More than 9 in 10 investors (91%) see event risk as a threat, compared with only three-quarters in 2016
  • Equity market risk has taken a similar prominence, weighing on the minds of 90% of investors (2016: 77%)
  • Reflecting this focus, nearly 3 out of 5 investors (59%) claim that recent political events have led to an increased emphasis on risk management in their institution.

In their quest to balance risk and return, active management comes to the fore as two-thirds (65%) of investors say that actively managed investments play an important role in portfolios in the current market environment.

The RiskMonitor findings show that investors face a risk-return “conundrum”, as they seek to optimize the risk-return trade-off in uncertain markets. This caution is reflected in return expectations for the coming year, with more than half (51%) lowering their targets despite a strong recent performance by equity markets.
Revealingly, 53% are willing to sacrifice upside potential in order to have tail-risk protection.
As they struggle to reconcile the risk-return conundrum, investors see shortcomings in existing risk management approaches. Nearly 3 out of 5 (58%) are looking for new portfolio strategies that balance the risk-return trade-off. But they acknowledge the value of alternative assets for diversification, with 31% citing this as the single most important reason for investing in alternatives – ahead of any other factor.
Encouragingly, the study reveals a select group of investors that are getting ahead of the risk-return challenge. These “Risk Leaders”, comprising around one-fifth of respondents, make risk management an integral part of the investment process. They are also characterized by a strong risk culture, led by senior management.