Celtic Tiger

Roaring success story set to continue as Ireland's hedge fund industry eyes rampant growth in 2008

Adjusting to change

In 2007, the Irish funds industry turned in a very strong performance to maintain its impressive growth pattern of previous years. Today, the industry services in excess of €1.5tn (Lipper Fitzrovia - June 2007) in approximately 7,500 funds (as at November 2007) and directly employs more than 10,000 people both in Dublin and, increasingly, in regional locations throughout Ireland.

More specifically, approximately one-third of global hedge funds by value and more than 50% of European hedge fund assets are serviced from Ireland, which demonstrates the expertise, capability and servicing standards that are available to fund managers and promoters in the jurisdiction.

2007 was a good year for IDA Ireland, which, as the Irish government’s inward investment agency, experienced considerable interest from both new entrants to the industry and from existing clients wishing to expand their Irish operations. Although the existing infrastructure in Ireland is already well-developed, 2007 saw the arrival of a number of new hedge fund administrators, including LaSalle Bank, Admiral and Apex, to supplement the already impressive list of more than 40 global service providers operating from here. The continued market entry of new service providers, whether fund administrators/custodians or other specialist service providers to the hedge funds industry, is clear evidence of the ongoing strong flow of business into Ireland and of client demand for Irish-domiciled/serviced product. It is also an indication of the funds industry’s ability to successfully address and manage the challenges that face any industry which experiences the phenomenal rate of growth the industry here has in recent years.

One of the ways in which this growth has been managed has been through the ‘regionalisation’ of the industry. In recent years, the service provider infrastructure in Ireland has grown strongly, with many fund administrators (such as The Bank of New York Mellon, State Street, IFS, PFPC, Fortis, Northern Trust and Citco) establishing second, and, in some cases, third operating centres in regional locations in Ireland. This has allowed them to access new pools of labour, to broaden existing linkages with third-level education institutions and to continue to grow their Irish operations in a more cost-effective and controlled manner. This trend continued in 2007, with new operations being established by Daiwa Securities (in Dundalk) and Apex (in Cork), while most of the existing regional operators also experienced significant growth.

As regards to product development initiatives, a number of significant developments occurred during 2007 which further positioned the industry for continued growth. The most important of these perhaps was the introduction of a ‘filing only’ basis of authorisation by the Financial Regulator for Qualifying Investor Funds (QIFs), whereby, under certain conditions, a QIF can now be authorised in Ireland within 24 hours. Since this revised authorisation process was introduced, more than 70 funds and 219 sub-funds have been authorised under this new fast-track process. As fund promoters (particularly institutional investors seeking the added respectability that an EU domicile such as Ireland provides) tend towards creating regulated or ‘onshore’ products, demand for this product is likely to increase considerably.

Similarly innovative approaches to creating solutions for fund promoters were also in evidence through, for example, the development of UCITS III products in the spheres of ETFs, 130/30 funds, asset pooling and the ability of UCITS funds to physical short stocks following a ruling by the Irish Financial Services Regulatory Authority. New product development and innovation are a crucial element of the industry’s offering to global fund managers, and must remain an integral part of the approach taken by public and private partners alike in the further enhancement of Ireland’s offering.

In this respect, IDA Ireland made significant progress during 2007 in positioning Ireland as an attractive location for the funds industry to become involved in innovation/R&D activity. For many years, multinational companies have established R&D centres in Ireland to take advantage of the availability of key relevant skills (a mixture of business and IT-related skills), a considerable academic research infrastructure, an attractive tax environment and strong government support for R&D initiatives. IDA has tweaked this existing model to make it attractive and relevant to the international financial services industry and the first flagship innovation/R&D project from a financial services group was secured in 2005 when Citi established an R&D Centre in Dublin, which represents the group’s first dedicated R&D capability globally.

In 2007, further significant investments were also secured from Merrill Lynch (€30m investment to create a research, development and innovation centre focusing initially on developing a centre of excellence in regulatory reporting and compliance for the wider Merrill Lynch group globally) and Fidelity Investments, which is establishing a team of 49 R&D staff in Ireland. This proposition of creating an innovation/R&D capability for either product development or process development/re-engineering purposes is addressing a demand from international groups seeking to differentiate themselves and their product/servicing offerings, while at the same time addressing their need for a more efficient and cost-effective operating model.

As many leading global players increasingly recognise the need to allocate specific responsibility and resources to managing innovation within their organisations, Ireland’s offering in this area appears to be striking a chord. There are compelling reasons for groups to consider engaging in such activities in Ireland, and IDA looks forward to further developing this potential with the funds industry in 2008.

Other important developments in Ireland during the year included the introduction by the Irish government of new work permit regulations in January 2007. These new regulations have significantly enhanced and streamlined the industry’s ability to source a wide range of relevant skills from outside Ireland where necessary. IDA has already supported its client base to secure a significant number of work permits and green card permits for appropriately skilled and experienced professionals under this new system.

A key factor behind the industry’s growth in Ireland over the years has been the willingness to continually adjust the model and supporting legislative and regulatory environments as industry conditions and international developments have required. This approach has been of paramount importance in driving the industry to its current level and, looking forward, it remains as crucial as ever to successfully addressing and embracing challenges and opportunities as they emerge. There is an ongoing need therefore for the funds industry and its partners to maintain a proactive and innovative approach to the future needs and competitiveness of the industry.

The enormous potential for further growth and development which exists will only be achieved by anticipating and responding to the needs of the international investment funds community, and by ensuring that innovation and responsiveness remain cornerstones of the approach of all parties.

Damien Hennelly, business development manager,
IDA Ireland,
February 2008

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