Luxembourg is Europe's leading investment fund centre, and the world's largest after the USA, with more than €3 trillion in assets managed by a multitude of international fund managers. Indeed, its reputation as a respected fund hub has been carefully built and maintained over the last decades.
However, even though the investment funds themselves are located in Luxembourg, the majority of the investment decisions are taken by fund managers located elsewhere, such as the EU, Switzerland, the USA, Asia and beyond, under the so-called delegation model.
This delegation model has been embedded by the AIFMD and UCITS directives, which recognise that the investment capabilities and expertise—in asset classes like global and regional equities, real estate, infrastructure and direct lending—lie with specialist teams of fund managers and their research teams in different parts of the world.
AIFM and UCITS management companies need to have strategic decision-making abilities and management in Luxembourg, with sufficient substance, people and systems to effectively manage their overall operations. A delegation of investment management must be supported by risk management as well as by delegate oversight teams on the ground in Luxembourg that are responsible for due diligence and effective monitoring of the delegate's performance.
A Brexit shift
London's power and influence in the realm of managing EU funds is similarly longstanding. And because its fund managers do not rely on the passporting rights that are likely to soon vanish due to Brexit, they will continue managing fund portfolios in the EU under the same delegation framework as managers in New York, Geneva or Tokyo—allowing EU funds to access the best performance-generating expertise and for fund investors.
However, when it comes to managing institutional portfolios from London, such as pension funds or insurers, London's fund managers rely mainly on MiFID passporting rights, a privilege that London is very likely to lose from outside the EU.
A bridge to Europe
The UK will no doubt remain an important partner in Europe, but Brexit means that a bridge from London to continental Europe must be found, allowing UK-based firms to keep market access. Such firms are likely to use Luxembourg as this bridge, given the strength of the small country's fund industry and the long experience with the delegation business model.
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