During the past few years, the Irish Funds industry has been focused on taking full advantage of the opportunities that the Undertakings for Collective Investment in Transferable Securities III (UCITS III) Directive presents. This had led to significant innovation in production, principally through the use of financial derivative instruments such as the use of total return swaps by index tracking and exchange traded funds, the development of 130/30 type funds and the expansion of money market funds.

UCITS funds currently represent 80% of the total net asset value of Irish registered funds. The total number of Irish registered funds as at 31 December, 2007 was 4,780. The administration of non-Irish registered funds is another critical component of the Irish Funds industry and, based on figures provided by the Lipper Ireland Fund Encyclopaedia, there were 2,752 of such funds being administered in Ireland as of 30 June, 2007. These funds are almost exclusively alternative investment funds.

Having established industry leadership in terms of a UCITS domicile and a hedge fund administration centre, the Irish funds industry has been taking steps to also become the domicile of choice for alternative investment funds.

While the regulatory framework for qualifying investor funds (QIFs) (which require a minimum investment of E250,000 (£196,000) and certain minimum net worth requirements to be complied with) has been in place for more than 10 years, the growth of these products has not matched the growth of either UCITS fund or non-Irish registered funds.

These funds are, for the most part, administered, listed and audited in Ireland and it is logical and appropriate that they should be domiciled in Ireland as well. As the distinction between UCITS funds and alternative investment funds narrows, the Irish funds industry has been focusing on enhancing the regulatory regime for QIFs with the aim of providing a regulated fund product that compares favourably in terms of investment flexibility and speed to market with fund products available in the existing unregulated jurisdictions.

We are seeing increasing numbers of alternative investment managers who would have traditionally used Cayman and other hedge fund domiciles choosing Ireland as their domicile in order to meet the demands of investors who, in current market conditions, are seeking greater levels of transparency, corporate governance and regulatory oversight. These promoters, having established Irish domiciled QIFs and having grown comfortable with regulatory regime in place, are beginning also to look at the product possibilities offered by UCITS III which is rapidly becoming the global brand for fund vehicles.

Key developments and dates

- August 1996 – establishment of first QIF fund. Following the previous introduction of a professional investor fund structure with a minimum investment of E125,000 (£98,000) where investment restriction were disapplied on a case by case basis, the QIF structure permitted the establishment of funds with no applicable investment limits subject to a minimum investment of E250,000 (£196,000) and certain minimum net worth requirements.

- 2000 – prime brokerage guidance note. This development facilitated the establishment of Irish-domiciled hedge funds as the Irish Financial Regulator permitted financing arrangements with a prime broker where fund assets may be transferred out of the control of the custodian. The prime brokerage guidance note has been amended on a number of occasions to provide greater flexibility particularly for QIFs.

- 2001 – fund of funds and feeder funds guidance note. This guidance note, which was issued in 2001, provided the industry with clear guidance on the financial regulator's approach to fund of funds and feeder funds and it has been updated to deal with issues such as
master-feeder structures and investing in the types of funds that have lock-up periods. There is also regulatory provision for retail fund of hedge funds and funds of unregulated funds.

- 2005 – Investment Funds, Companies and Miscellaneous Provisions Act. This piece of legislation introduced the concept of segregated liability between sub-funds of an umbrella structure so that no umbrella fund should be obliged to apply the assets of a sub-fund to discharge the liability of another sub-fund within the same umbrella structure.

This important legislative change, which is similar in scope to protected cell structures, facilitates the establishment of leveraged sub-funds within a corporate umbrella structure. The Act also facilitated the introduction of non-UCITS common contractual funds.

- 2006 – update to regulatory regime for QIF property funds. While a regulatory regime always existed for property funds at retail level, the regulatory requirements gave rise to a number of issues for QIFs. In 2006, the financial regulator clarified its position in relation to these issues. The revised policy position provides (i) for the use of multiple layers of SPVs; (ii) that property assets may be registered in name of the fund company; (iii) clarity with respect to the role of the custodian; and (iv) guidance on (a) the approval of the fund promoter/investment manager; (b) the appointment of an independent valuer; and (c) method and frequency of valuation of property assets.

The writer participated in the European Commission's Expert Working Group on Open Ended Real Estate Funds which calls for the introduction of an EU framework for cross-border retail distribution of open-ended real estate funds. The Irish funds industry will be actively supporting the key findings of the Group and recognises property as a core asset class.

- 2007 – fast-track authorisation process for QIFs, stage one. While all of the fundamental pieces for a successful alternative investment fund domicile have been in place for some time, Ireland could not compete with the off-shore jurisdictions in terms of speed to market and this issue had long been identified by the hedge fund sector as a key inhibitor to the growth of Ireland as a domicile.

To deal with this critical issue and following a detailed process of engagement with the financial regulator, a new fast-track authorisation process for QIFs was introduced in February 2007. This allows for a 24-hour approval process for fund authorisations. There is no pre-checking of documents by the financial regulator. Fund documentation is filed on the basis of agreed parameters with the financial regulator based on detailed application forms completed by the fund lawyers. While any new or novel features will need to be pre-cleared and the financial regulator reserves the right to carry out spot-checks, the authorisation granted is not conditional. In order to avail of fast-track authorisation process, the service providers (including the promoter, management company, custodian and the directors of the QIF) must be already approved by the financial regulator.

- 2007 – approval of side-pockets. The financial regulator also approved the use of so-called side-pockets by funds. Side-pockets are used by funds where portions of the assets of an otherwise liquid portfolio are illiquid or difficult to value. The creation of a side pocket allows the fund to 'park' the illiquid or hard-to-value asset to be held in proportion by the investors on record at the time the side-pocket in created. This will ensure that these investors will not be permitted to redeem this proportion of their investment until the side-pocketed assets is actually realised and that incoming investors will not be required to participate in a portfolio comprised of illiquid investments or have their subscription monies used to provide liquidity in circumstances where there are illiquid investments in the portfolio.

- 2008 – fast-track authorisation process for QIFs, stage two. There is ongoing engagement with the financial regulator with a view to providing a regulatory regime that is both prudent and pragmatic and that recognises the nature of the underlying investor. Further developments in the QIF regime are currently being negotiated including dispensing with the requirement to produce interim financial statements, relaxing the minimum net worth requirement of E25m (£19.6m) for institutions, permitting the use of separate prospectuses for share classes and the direct appointment of prime brokers as fund custodians. We expect to see progress on all of these issues in the early part of 2008.

Declan O'Sullivan is an asset management and investment funds partner at William Fry.