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Why don't large international investors invest in the same funds as you?

In the EU more and more alternative investment fund managers are becoming more and more -are governed by the AIFMD (Alternative Investment Fund Managers Directive). The alternative investment nomenclature includes all European investment vehicles that do not meet the requirements to be considered UCITS (Undertakings for Collectible Investment in Transferable Securities). If, in addition to being non-UCITS, their managers comply with the above-mentioned directive, they will be considered AIFMD funds. UCITS funds are those usually sold by Spanish banks to their retail and private banking clients. However, it should not escape anyone's attention that on the other hand alternative investment funds are the funds of choice for major investors worldwide. In other words, although for the vast majority of Spanish retail and private banking investors their investment universe is limited to the 10,000 or so UCITS funds marketed by banks in Spain, for professional investors and the world's wealthiest individuals, alternative investment funds and hedge funds make up the vast majority of their portfolios. In other words, most of the world's best funds in history (some even closed to new investors as they do not accept any more money) are not UCITS and are not marketed in Spain, but alternative management funds, which can be invested in jurisdictions that are much less restrictive than Spain.

Let us remember that there are more than 100,000 investment funds in the world. And the million-dollar question is, how can a Spanish retail investor access this universe of 90,000 non-UCITS funds that are not marketed in Spain? The answer is not so simple, as it is not enough to open an account in a bank abroad. There are additional difficulties The most common problems encountered by the ordinary Spanish investor, such as taxation, which is linked to the jurisdiction where the fund is domiciled, are as follows. As we will see below, funds do not necessarily have to be domiciled in the same country as the management company. Most of the world's alternative investment management companies, domiciled in the USA, Asia, etc., have their headquarters in the same country as the fund management company. have local funds for investors in their own country, but they also have replicas of these funds in offshore jurisdictions for large international investors.

The reason why fund managers create these mirror funds or feeder funds for international investors in offshore jurisdictions, where taxation for the investor is zero, is not so much so that they do not pay taxes, but so that they are not harmed by the taxation of the country where the fund manager is located in addition to their own taxation. In other words, if they invest directly in local funds, they would be subject to double taxation: That of the country of origin of the fund manager and that of their own country where the investors reside. It is true that in some cases such double taxation could be fully or partially recovered if there is a treaty between the two countries to avoid it, but not in all cases. Moreover, even in those cases where such treaties would be beneficial, it is still an inconvenience that adds to the investor's fiscal discomfort and uncertainty.

This is why large international investors often use offshore and non-EU mirror funds, mirror funds or feeder funds domiciled offshore and in non-EU countries. OECD to invest in funds from American, Asian, etc. fund managers. In this way a Spanish investor who invests in a US hedge fund, for example, should not be taxed in both the USA and Spain, but only in Spain, without the need to resort to bilateral treaties to avoid double taxation.. The problem is that Spanish taxation penalises investors resident in Spain who invest in funds domiciled in these offshore countries, where the aforementioned replicas aimed at international investors are usually located (we will explain later how this penalty can be avoided).

Let us look at an example of a benchmark fund manager with the aforementioned duplicity of funds, aimed at investors according to their country of origin: The manager of the legendary fund Medallion (already closed to new investors since 1993) is the prestigious Renaissance, of which we have already we spoke at length and explained our visit to their bunker in this article. Well, this fund manager, like so many other world leaders in management, has funds for domestic institutional investors (US-investor), domiciled in the USA; and funds domiciled in Bermuda for foreign investors (non-US investors). As we have already said, the distinction is made so that the international investor does not suffer the taxation of the funds domiciled in the USA and so that they only have the effects of the taxation of the respective countries where each investor resides.

However, there are also other reasons for fund managers to domicile their funds for large international investors in non-OECD/offshore jurisdictions. In addition to avoiding double taxation for the international investor and saving taxes for the fund manager itself, those jurisdictions do not entail any restrictions in terms of trading platforms or geopolitical vetoes when it comes to underwriting funds. For example, most international investors would find it very difficult to subscribe to funds in countries such as China, Korea, Indonesia, the Philippines, Vietnam, Russia, etc. In some cases because of political/economic sanctions imposed by certain countries, and in others simply because the markets are still technically, politically and/or regulatory unwilling to allow international money into their domestic funds.

The fact is that, whether by hook or by crook, large international investors use these channels created ad hoc for them. And either they are not penalised fiscally by their respective countries if they invest in these jurisdictions, or they have investment vehicles and structures that legally exempt them from these penalties. The loser, as always, is the ordinary Spanish investor, who is condemned to invest in the UCITS environment and the few retail hedge funds domiciled in Spain, in short, condemned to the fish that our banking system sells them.

It is true that some American or Asian fund managers, eager to attract retail funds from the European market, set up their own UCITS vehicles in Ireland or Luxembourg and register them for marketing in various EU countries. But unfortunately they are often not the brightest but the most voracious.. And they do not seem to mind giving up much of their alternative know-how and assuming the restrictions on portfolio concentration, liquidity, restriction of hedging and/or restriction of operational freedom in general that the UCITS label entails, in exchange for inflows of money from small European investors. The result is that these UCITS funds are very different from the original ones and with much lower returns.

Therefore, we are going to focus on the solutions so that a smaller Spanish investor can access the best American and Asian hedge funds on the planet without suffering, on the one hand, double taxation for investing in their funds aimed at local investors, and on the other hand, the tax penalty for investing in their feeders or offshore mirror funds aimed at international investors. There are two absolutely legal and transparent ways of doing this:

By having a european investment vehicle, within which these funds can be subscribed for foreign investors (we explain this in The advantages of investing from Luxembourg).
Investing through a AIFMD fund of funds which in turn contains those offshore funds (we explain in Funds that make inaccessible funds accessible).

This second option solves in one fell swoop the 3 problems encountered by the ordinary Spanish investor:

First of all, the first insurmountable problem for most investors is the minimum investment requirement. And the fact is that The best funds in the world often lack retail classes and require prohibitive minimums of $500,000, $1 million or even $5 or $10 million or euro equivalent. Moreover, without going any further, funds such as those of the aforementioned Renaissance not only require a minimum investment of 5 million, but they also select the institutional investors they like the most, and can be rejected even if they exceed this minimum investment (Cluster Family Office had to pass this filter to be approved as investors in Renaissance, considered the best fund manager in the world for several decades). Well, these AIFMD funds of funds that contain large institutional funds 125,000 minimums are usually as low as 125,000 eur.

Secondly, it avoids the tax penalty that offshore investments suffer from, as explained above, as they are funds domiciled in Luxembourg and under the AIFMD label. Therefore, Spanish regulation and legislation considers their capital gains to be as deferrable over time as those of any Banco Santander or La Caixa fund.

And thirdly, by investing in them from accounts in Luxembourg banks, it avoids the restrictive reading of the Spanish regulator to qualify as a professional investor, This makes it de facto impossible for ordinary investors to subscribe to these funds from Spain. These Luxembourg funds are marketed exclusively to well-informed investors (or qualified or professional investors, depending on the nomenclature of each jurisdiction). In other words, a Spanish retail investor cannot invest in them from a bank in Spain, as alternative management is considered a complex product, even though it bears the European AIFMD stamp. Therefore, according to Spanish regulations, these AIFMD funds can only be marketed in Spain for professional investors, which implies very restrictive requirements that are impossible for ordinary investors to comply with. Moreover, the only way for a retail investor to explicitly request to renounce his status and be allowed to invest in these funds from Spain as a professional is to comply with the following requirements at least two of the following requirements according to Spanish regulations:

That the client has undertaken transactions of significant size in the relevant market in the financial instrument in question or similar financial instruments, with an average frequency of 10 per quarter over the previous four quarters.
The size of the customer's portfolio of financial instruments, consisting of cash deposits and financial instruments, exceeds EUR 500,000.
The customer holds or has held for at least one year a professional position in the financial sector that requires knowledge of the operations or services envisaged.

It should also be noted that it is the Spanish marketer or bank itself that must check and demonstrate to the regulator that these requirements are met, and that it will obviously prefer to sell this client its usual catalogue of own and external retail funds with its juicy implicit or explicit fees, rather than consider him eligible to buy alternative funds that are outside its marketing agreements. It is obviously de facto impossible for most Spanish investors to access such funds from accounts in Spain.

By contrast, Luxembourg's regulation is much less restrictive and much more friendly with alternative investment funds for junior investors, as it is sufficient to be considered as a «well-informed» investor. The regulation reads as follows:

To qualify as a «well informed» investor you must be either:

An Institutional Investor
A Professional Investor
Any other investor who has confirmed in writing that they adhere to the status of a «well informed» investor and who:
- Either invests a minimum of EURO 125,000 in the specialised investment fund;
- Or who has an appraisal from an EU bank, an investment firm or a management company certifying that they have the appropriate expertise, experience and knowledge to adequately understand the investment made in the fund.

In other words, that 125,000 is sufficient for any investor to apply to be considered as an investor in Luxembourg. well-informed and therefore eligible to invest in an AIFMD fund. It is therefore advisable to open accounts with Luxembourg banks in order to be able to invest in these funds. Another thing is that banks require a minimum amount to open accounts for new clients, which is unfortunately often the case. That is why it is also essential to work with a professional who has a sufficient number of clients with these banks, i.e. who has influence on them to persuade them to accept new clients with accounts as small as 125,000 euros.

In short, thanks to Luxembourg's less restrictive legislation, any Spanish investor with a minimum of 125,000 euros can invest in a completely legal and transparent manner in AIFMD alternative funds that contain the best alternative funds and hedge funds in the world, despite having very high minimums and being domiciled in jurisdictions only suitable for large institutional investors with complex investment structures and vehicles.

The drawback obviously is that a fund of funds is commission on commission. It is therefore necessary to look very carefully at the historical NET returns obtained by the fund, and whether or not these are clearly higher than those obtained by each individual in their UCITS investment portfolio and Spanish banking universe..

In the tables above you will see the historical performance of 3 world-renowned hedge funds - which some of you may recognise - with minimum investment levels of half a million, one million and 5 million. And finally, below these lines, the performance of a Luxembourg fund of funds AIFMD, therefore accessible to any investor. well-informed with an account in Luxembourg from $125,000, containing a dozen international funds (including the 3 above) plus a few listed stocks (Berkshire Hathaway...), so that you can compare it over the long term with your own portfolios.

And finally, for those who still think that the limitations of the UCITS environment are worth it because of the possibility of investing only in transferable funds, here is an article entitled «Is it worth holding on to an upgradeable investment in exchange for further deferring accumulated capital gains?«. The results of the calculations you will find in that article are devastating, as just by improving the return by 0.21% per annum, the benefits of 20 years of capital gains deferral are outweighed by the average return of the last quarter of a century. More importantly, once the sold portfolio has been taxed, in addition to being free to invest at a higher yield in any hedge fund in the world, you can also defer taxation forever, either with your own investment vehicle or through a fund of funds AIFMD, as explained in points 1 and 2 above.

Having said all this, for those who do not have that €125,000/$ minimum, there are honourable exceptions in the limited and mediocre UCITS environment. World-renowned Spanish value managers such as AZ Valor, Magallanes or Paramés himself (although his COBAS has yet to make headway) may be the best way to invest a small portfolio in an easy and simple way.

Elite athletes and their money. The simple lesson of Shaquille O'Neal.

In the following video we see a Shaquille O'Neal in his maturity, giving advice that is as simple as it is important to other professional colleagues, i.e. elite sportsmen. Logically, his advice is only useful for sportsmen, artists or any other person who has a sudden fortune (lotteries, technology entrepreneurs, heirs, etc.) large enough to never have to worry about their future or that of their children and grandchildren. Watch the video of this tweet and then we'll give you some thoughts:

Shaq has a simple piece of advice for NBA players who don't want to lose their millions pic.twitter.com/tAFwvbQ89m

- Business Insider (@BusinessInsider) November 20, 2017

Surely following this simple advice, for which every human being is potentially qualified, would have prevented the vast majority of sportsmen and women from going bankrupt in the course of their busy lives. Notice that neither education nor knowledge is necessary to avoid disaster when a certain level of million-dollar contracts is reached. All that is needed is common sense and rigour. Unfortunately, most elite sportsmen and women, uneducated and from humble origins, drunk on fame and money, often lack both virtues.

However, most mortals do not reach those income levels, obviously, and need to fine-tune much more than the simple norm of Shaq their wealth progression throughout their lives. Every wealthy life is different. Circumstances in terms of professional income, income from financial and real estate investments, necessary or desired expenses, family burdens and, in short, the lifestyle that each person or family chooses, together with the uncertain future that each human being faces (separations, illnesses, deaths, disabilities, addictions, fraud, accidents, etc.), make each case practically unique. And logically, some tool is needed that allows a glimpse of the wealth projection that can be expected in the face of a more or less prolonged life. This is where everyone can make their own «old-age account», or go to a wealth management professional to get an idea of the progression they may have in the future, and adjust or modify any calculation or lifestyle errors they may be making accordingly. Here is an example of a wealth projection table that we use with some of our clients at Cluster Family Office:

In projections such as those in the image above, we try to incorporate some of the variables that can be intuited from the data and knowledge of our Clients' circumstances. In the projections we make at CFO we handle data such as professional and non-professional income, expected length of working life, present and future income consumption, inflation, financial and real estate yields, personal taxation, taxation of the investment vehicles that each family has in Spain and abroad, etc.

However, it is obvious that the further out in time the projection is made, the less reliable the predicted data will be, as deviations multiply over time with a greater effect on the result than compound interest itself. But despite the impossible accuracy, this tool is always a great help in resituating the lifestyle of families and, above all, in opening our eyes to the uncertainty of living a long wealthy life in the ever-changing world we face. And the uncertainty of progression is particularly revealing. when the proportion of real estate is abused in equity or when the era of conservative fixed-income portfolios is more of an asset trap. potential losses from which very few will escape.

The evolution over time of an unbalanced estate that makes the wrong decisions, compared to the evolution of a balanced estate of financial, business and real estate assets, with the correct optimisation of each of them, is totally different after 5 years. But if we project the errors with respect to what would be the correct distribution of assets and liabilities and their management, beyond 15 or 20 years, the difference is abysmal. What today may appear to be a minor imbalance or inefficiency, a minor deviation, over time is the key to success or failure in our old age and for the well-being of our children.

Year 2007: An olive tree plus one...

It is almost 10 years since we left the age of financial innocence. That time when indebtedness was not, as it is today, a vital necessity to avoid bankruptcy, but an abused tool to grow and make money out of nothing recklessly. The mirage of bonanza began to fade as early as 2007, although for most mortals the collapse was not evident until the stock markets crashed in 2008. Thinking back to that pre-crash era, a real estate deal we came across in 2007, shortly before the systemic disaster, came to mind. Of course, when we look back at the transaction we are now recalling, we could not have ended up in any other way than plunging into the financial abyss:

The real estate transaction in question was a plot of land to be developed in Andalusia, of very considerable size and price: 58 million €. The negotiation was already focused on the mere interest to be paid for the 50% of the agreed 3-year deferred payment. Up to this point, everything was normal and the previous contacts between buyer and seller were made with the intermediary on duty, an expert professional, one of those who, if you are careless, sells you the Palacio de Versailles as chateau and with a discount for early payment. However, at a certain point in the negotiation, we were able to deal directly with the sole owner of the land, whom we did not yet know: A middle-aged man with a rustic and prudent appearance. But when we started to get down to business, he told us very seriously that the deferred €29 million had to be paid «...".«at the same interest rate as the bank, olive tree plus one«.

We must admit that although we have fought in many bullrings (I would say in almost all of them), it took us a few seconds to react. This was not irony or a joke, or even a metaphor. I was reluctant to believe that someone who confuses the Euro interbank offered rate (Euribor) with the oil yield plus a unit of something I don't even want to imagine, is going to become overnight the owner of 58 million euros: 29 million euros in cash and 29 million euros in 3 years with their corresponding e very interesting olive trees plus one. Comical as well as alarming and scandalous, although many of us envy him from our modest backgrounds.

What will have become of this man and his family after 10 years? Unfortunately we were not able to keep in touch, as his banker-friend (sic) took over, at least for a while. Based on our experiences as asset advisors, I don't think they were any happier than they had been up to the time of the sale. Especially now, after 10 years of covering the mistakes with money that was apparently never going to run out. During these years they will have been manipulated, robbed, swindled, flattered, and squandered in the broadest sense of the word. They will have been the fodder of all those around them, whether they are part of the family or not. Cross hatreds that, with their poor training, have possibly ended or will end tragically. The best thing that could have happened to them was to sell land worth no more than a few million euros. In this way they would have tasted the sweetness of abundance but with fewer enemies, and probably in a few years everything would have returned to «normal», at most some residual and usable property for their children. I hope they have been able to realise their dreams, at least temporarily. But paradoxically They will not have had an easy life after the sale, unless they were just robbed by an honest law firm that took pity on their limitations and cleverly insulated them from their fortune.

At that time (spring 2007) we wrote the following: «It is an aberration that a farming family's land, which has served to feed their ancestors with more than dignity, should overnight be turned into a fortune for which no one has ever prepared them. Perhaps this is an aberration comparable to that which the purchasers of the houses to be built on this land will have to suffer, with mortgages that their children will inherit if they are not repossessed. In the case of the farmer it seems to me to be a creation of wealth against all the laws of capitalist economics. And in the case of the buyers of these flats it is a creation of poverty, curiously enough at the same interest rate: olive tree plus one».

Unfortunately, the financial system could no longer withstand such aberrations, and the nouveau riche rural nouveau riche, the new owners of flats, the construction companies and the banks that financed that nonsense, were caught flat-footed. And the worst thing is that, seen in a decade's perspective, the jungle of the markets and the economy of that time seems like child's play compared to the scenario we face today. Because the collateral effects of dynamiting the price of money to save the unsalvageable have only just begun.