Real Estate Equities

Real estate has an important role to play in any diversified portfolio. Global real estate has performed well historically, returning 7.5% p.a. over the 15 years to the end of 2015. It has typically provided a high income return component (over 80% of total return from income and 6.1% p.a. income return over the same period) and can provide inflation protection, making it a desirable asset class for investors and a core, though often overlooked, part of a mixed asset portfolio (see Fig.1). Critically, investable income producing real estate is estimated to have a gross asset value of around $34 trillion2 and represents some 18% of the total global real estate market of $191 trillion.

Accessing real estate efficiently can prove difficult for many investors, as building a diversified real estate portfolio directly through private ownership can be very challenging. In particular, this is because real estate assets are large and require specialised management and local expertise, making it difficult for investors without large pools of capital to invest at the required scale for both diversification and cost efficiency. An alternative way of gaining exposure is through the public market.

An Overview of the Italian NPL Market

In 2016 the gross book value (GBV) of NPLs on Italian banks’ balance sheets exceeded Euro 200 billion. Interest from foreign specialized investors has increased considerably in recent months. During 2016 we have seen an increase in the number of transactions but it is also true that this market has so far not expressed all its potential. Driven by the aim of helping Italian banks clean up their balance sheets, the Italian Government has put in place several initiatives both to facilitate the disposal of the NPLs and to reduce their occurrence going forward. These initiatives fall into four categories: (A) the introduction of a State guarantee scheme (known in Italy as “GACS”) whereby the Italian Treasury guarantees senior tranches of ABS backed by Italian NPLs; (B) the improvement of Italian bankruptcy and enforcement proceedings, (C) the introduction of new forms of security interests, and (D) opening up the market to direct lending by alternative investment funds (AIM). The idea is to make the Italian lending market more creditor friendly overall which in turn should encourage the further funding of the real economy.

The New Face of US Financial Regulation

While we have a new President elect in the United States, history suggests that the identity and leanings of the future Secretary of the Treasury and the appointees to the regulatory agencies may be just as important to the future of financial regulation. When all is said and done, it is the regulators who actually articulate, implement and enforce (or not) day-to-day financial services policies.

Though we may not yet know who those regulators will be, we do know some of the important issues that they will confront.

Perhaps one of the more significant issues is the increasing cost and burden of regulation. No comprehensive government analysis of the costs or benefits of the Dodd-Frank Act was done before it was enacted into law, and none has been done since. While no one can argue that financial institutions should not be closely supervised, the financial impact of the regulatory correction since the crisis has been staggering. On October 20, 2016, The Wall Street Journal reported that global banks have incurred $275 billion in costs penalties and compliance charges since 2008. The more meaningful point is the impact on the market – a $5 trillion reduction in lending capacity.

How global financial regulation is applied is also an important issue. The American Banker recently characterized the European Union’s indication that it will not follow the Basel Committee’s recommendation on standardized credit or operational market risk rules for fear of stifling economic growth as a “stunning move.” This underscores a concern in the United States that US regulators seem to enforce global standards with less exceptions for market-related considerations.

Luxembourg – The Better Compromise

The EU referendum in Great Britain has brought Europe’s achievements back into public consciousness; many people had started to take those achievements for granted. One such institutional achievement is the European single market, which has made cross-border financial services possible. The 1985 UCITS Directive (85/611/EC) was an extremely successful standard for investment funds applicable for the first time in all member states.

This directive has made Europe more attractive in terms of global competition, because on the one hand it enables regulated competition for the best jurisdiction for fund vehicles within Europe, and on the other because it gives the European Union a strong competitive position, above all in Asia and South America. Investors and asset managers value this variety within a reliable, modern framework. Above all, the passporting introduced with Directive 2009/65/EC further strengthened competition within Europe, because it means that it is significantly easier for a fund authorised once by UCITS in an EU country to apply for an operating licence for other member states.

The right choice of location
For providers of UCITS funds, finding the most suitable location within the EU is a decisive factor for its product and its investors. When Aquila Capital was looking for a jurisdiction for a UCITS platform a good ten years ago, there were good reasons for choosing recognised fund locations such as Germany, France or Ireland. After intensive scrutiny and consideration of all the relevant aspects, the choice fell on Luxembourg, where, after thorough preparation, the UCITS platform finally got off to a successful start in 2007. But it was already clear to Aquila which country would become the leading jurisdiction for UCITS funds in Europe in the aftermath of the economic crisis.

5th FERI Hedge Funds Investment Day


What is the Right Way? Offshore or UCITS?
Marcus H. Storr, Head of Hedge Funds, FERI Trust GmbH, Bad Homburg/Germany

Innovation is the Foundation for Systematic Investing
Harold M. de Boer, Managing Director, Transtrend BV, Rotterdam/Netherlands

A Disconnect in Global Markets
Crispin Odey, Founding Partner and Portfolio Manager, Odey Asset Management, London/United Kingdom

Deal Spreads and Flow Are Key
Steven R. Gerbel, Founder and CIO, Chicago Capital Management, Chicago/USA

A Fundamental Approach to Investing
Peter M. Schoenfeld, Founder, CEO & CIO, P. Schoenfeld Asset Management LP, New York/USA


What is the Right Way?
Offshore or UCITS Hedge Funds?

Marcus Storr, Head of Hedge Funds, FERI AG

Natural Gas

Natural gas prices around the world, from North America to Europe to Asia, are coming together after years of drifting apart. Before the natural gas production boom in the United States in 2007, prices in top consuming regions of the world were loosely connected. There was plenty of price-spread risk, even though the secular patterns were clearly linked. However, from 2008 to 2015, regional natural gas prices became delinked and danced to the tune of their own drummer. The reasons for this were varied. In North America, growing domestic supply was the real issue. In Asia, the challenge was the shutdown of Japan’s nuclear power industry after the devastating earthquake and tsunami. Europe faced tensions amid disruptions in Ukraine that escalated risks concerning gas supplies from Russia. Also, over the years, the practice of pricing natural gas in Europe and Asia benchmarked to Brent crude oil has been eroding to the point that the link is breaking as long-term contracts expire.

The collapse of crude oil prices in late 2014 was the catalyst for bringing regional natural gas prices loosely back in line with each other. But, over the decade of the price divergence, a lot had happened. The US created the capacity for liquefied natural gas (LNG) exports, and in September 2016 initial US cargos of ethanol started unloading in Scotland. New gas sources were developed in the Asia-Australia region to supply Japan. Russia inked a long-term natural gas deal to supply China. For these reasons, the question now is whether regional natural gas prices will stay engaged or if another bout of divergence is on the horizon. Interestingly, some clues may come from the evolution of electrical power generation. We turn first to the implications of the growing global role of natural gas in power generation. Then we provide some summary comments suggesting that prices staying connected is the more likely scenario than moving apart again.

Editor’s Letter - Issue 117

If fewer hedge funds are launching than in prior years, this is partly due to the time taken to start funds, set up management structures, or get onto third party platforms. But various options are marketed as offering a faster time to market.

Offshore international financial centres, including Jersey and Guernsey, say their regulators are swifter in signing off new management companies and funds. Some onshore centres also offer fund structures with potential for ‘fast track’ approval.

For those that already have an AIFMD-compliant management company, unregulated funds can be approved in days or weeks. Luxembourg’s RAIF (Reserve Alternative Investment Fund) and Malta’s NAIF (Notified Alternative Investment Fund) are not authorised, supervised nor regulated by their respective regulators (the CSSF and MFSA), and can avail of AIFMD passporting rights. Ireland has not coined a new fund name nor acronym, but its unregulated limited partnerships, run by AIMFD-compliant mancos, offer the same two key features: as AIFs they can be passported, but are not regulated by the Central Bank of Ireland.


The countdown towards the new implementation date of 3 January 2018 has begun, and firms need to be getting to grips with the detail of MiFID II and preparing in earnest for the important changes under this new regime.

Are we there yet?
The final “Level 1” legal texts (comprising a revised Markets in Financial Instruments Directive (the MiFID II Directive) and the Markets in Financial Instruments Regulation (MiFIR), together MiFID II), which were published in June 2014, represent only one layer of the regime. The “Level 2” measures (delegated acts and binding technical standards) and “Level 3” measures (guidelines and recommendations) are in the process of being finalised. These expand upon the Level 1 legislation and contain (or will contain) crucial technical details and guidance that are necessary for firms (and regulators) to be able to comply with the high-level provisions in the Level 1 texts. The lack of finality and certainty over the Level 2 measures in particular has meant that many firms have, understandably, been reluctant to commit full budget and resource to their MiFID II implementation projects so far.

Despite the twists and turns, however, it seems that the end (or, rather, the beginning) is finally in sight. With the Level 2 measures almost finalised and the new implementation date of 3 January 2018 confirmed, there is now a much clearer road ahead to implementation. Although 2018 may still seem some way off, given the amount of preparation required it will remain a challenge for firms to meet this deadline, and (as we mentioned in our earlier alert) Brexit is certainly not a reason to delay or scale back MiFID II implementation plans.


In 2014 and 2015 Russia was given a substantial economic blow following a new oil price shock and the implementation of economic sanctions for its annexation of Crimea and its active role in destabilising Eastern Ukraine. This triggered its first significant devaluation crisis in December 2014. Following a series of emergency rate hikes, which were instrumental in supporting the rouble, the currency renewed its weakness to reach an all-time low of 80 versus the US dollar in January 2016, as oil fell below USD 30 per barrel. Since then a period of exceptional stability has prevailed globally and Russian assets are among the top performers this year. At this juncture, we deem it useful to look again at the current economic environment, corporate performance, and market factors to draw a reasonable near term outlook. We have identified the following catalysts:

A Testing Time For Europe’s PRIIPs Regime

PRIIPs is an acronym for Packaged Retail Investment and Insurance Products. It represents a cross sector initiative, affecting asset managers, insurance companies and banks, aimed at creating a new standard common disclosure document for retail investors. The premise of the legislation, besides supporting the European single market, is to enhance comparability of PRIIPS with UCITS funds and the overall comprehensibility of financial products for retail investors - as highlighted in the explanatory works to the proposal of the European Commission - through a standard pre-contractual disclosure that is the same across the various sectors and product types.
The PRIIPs legislation is undoubtedly amongst the most ambitious regulatory efforts in recent memory and, in some respects, also one of the most innovative pieces of financial services legislation currently under works at a European level. We are also now witnessing how it is becoming one of the most debated ones. In fact, the PRIIPs regime was created through a regulation, which dates from 2014, as well as regulatory technical standards as delegated regulation. The topic of PRIIPs has been heavily prevalent in the news during the past number of weeks because the process of adoption of PRIIPS legislation has been halted by a group of members of the European Parliament, which have managed to gain the support of the Parliament in rejecting the proposed level 2 legislation, which covers the Regulatory Technical Standards (RTS).


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