Making London the capital of capital
The London Stock Exchange’s new Specialist Fund Market gives alternative investment funds their first-ever dedicated public market. Encouraging alternative funds to float in London can only help strengthen the City’s position as home to a community that forms a growing element of the global capital pool, bringing benefits to investment managers and investors alike, writes Andrew Wallace, senior manager for the Specialist Fund Market.
The contribution of alterna-tive asset managers such as hedge funds to secondary market liquidity is already recognised as significant and increasing. At the London Stock Exchange we have wit-nessed a dramatic race by this community to deploy evermore sophisticated tech-nologies to access our elec-tronic order book. This tech-nology arms race is also being driven by a desire to maximise the trading opportu-nities that our ongoing drive to reduce latency and expand capacity is bringing.
But while the day-to-day operation of these funds already accounts for a large portion of the liquidity pool in London, the funds themselves tend not to be major beneficiaries of it, with the majority operating as unregulated private funds incorporated outside the UK, albeit perhaps with a London presence in terms of their fund management operations.
Operating in this private market space can pose certain difficulties for investment managers and investors. For instance, as an investment manager, it can be more difficult to get your message across to a wider, global investor base and to demonstrate the public track record and appropriate levels of disclosure and transparency that are part and parcel of an institutional investor’s due diligence requirements. In addition, adequate secondary market liquidity that enables investors to exit their holding at a time of their own choice is lacking in the private market space.
The Specialist Fund Market aims to solve these problems by bringing buyers and sellers together via a dedicated public capital market, complementing the Main Market route for funds with a wider investor audience. It provides specialist investment vehicles with sufficient flexibility to pursue their particular investment strategies, while offering investors greater transparency and liquidity.
The Specialist Fund Market has EU Regulated Market status (and so is ‘MiFID compliant’) which allows unfettered access by the majority of major investors including pension, life and mutual funds. It can accept a wide variety of structures and security types that are more commonly found in the alternative fund space (for example, limited partnerships). Securities will be admitted to our world class trading platforms, providing the opportunity for price formation and secondary market liquidity. And by creating a permanent capital base, investment managers can concentrate more fully on generating longer-term investment returns.
The demand from investors for alternative sources of alpha is already large and growing rapidly. The root cause is demographics. There are now nearly 600 million people in the world aged over 60 years - a figure that is expected to double in the next 20 years. People are liv-ing longer, which means that traditional fund managers such as pension and life funds must make their assets work much harder for much longer. It is no surprise then that alternative assets already make up some 17% of institu-tional funds under manage-ment globally, with demand forecast to increase to over $1 trillion by 2010. Indeed, the hedge fund industry alone is now a $2.5 trillion business, with funds having trebled since the bear market of 2000-02.
Being able to offer alternative managers the opportunity to float their funds in London on the Specialist Fund Market will also create a magnet for new capital. It’s a virtuous circle - the more issuers that join, the more interest there is in the market and the more liquidity generated through an expanded investor base. As the alternative investment universe expands, we are delighted to be able to offer a market dedicated to bringing alternative funds and their investors together.