Retail Market Opportunities for Hedge Fund Promoters

1. Retail Market Opportunities for Hedge Fund Promoters Jim Murphy FSAI, FIA IBC Hedge Fund Administration and Prime Brokerage 11/12 February 2003 jim.murphy@lifestrat.ie

2. Agenda • The Opportunity – Life Insurance Investment Vehicles • Administration Issues • Sample Case Studies • Summary

3. Life Insurance Vehicles Home Member Stateresponsible for prudential supervision, including rules on allowable assets Host Member Stateresponsible for “General Good” provisions or local market conduct rules, aimed at protecting the consumer Regulation of EU life insurers governed by Third Life Directive:

4. Life Insurance Vehicles Home Member Stateresponsible for prudential supervision, including rules on allowable assets Host Member Stateresponsible for “General Good” provisions or local market conduct rules, aimed at protecting the consumer Regulation of EU life insurers governed by Third Life Directive: and so an Irish life insurer can promote its products in any EU member state provided local General Good provisions are met

5. Ireland Home Supervision Irish life insurers are regulated by the DETE and are governed by the 1994 Regulations • List of permissible assets includes- UCITs and other investment funds- shares and other variable yield participations- debt securities, bonds and other money and capital market instruments • Liquidity & marketability requirements- Assets must be “realisable in the short term”- DETE guidance indicates 6 months • Linked assets valued “in accordance with generally accepted accounting bases and principles”

6. The Opportunity! • “Other investment funds” facilitates non-UCIT funds including hedge funds provided liquidity & marketability requirements are met • Although not explicitly specified, DETE have indicated that a fund must provide limited liability as a pre-requisite for life insurance investment • Structured products can be classifed as “variable yield participations” or “bonds and other money or capital market instruments”

7. General Good Requirements • Vary from country to country • Typically might cover:-product information requirements- cooling off rules- regulation of sales intermediaries- regulation of sales process- advertising rules

8. Ireland General Good Key consumer protection measures for Irish consumers: • Disclosure Regulations- Disclosure information must be provided before client signs- Thrust of information covers nature of product and risks involved- Charges and sales commissions must be disclosed (performance fees present particular issues) • Regulation of Intermediaries- Central Bank Code of Conduct- Intermediary must recommend suitable product, appropriate to individual investor circumstances

9. Consumer Protection Other considerations: • “PRE”Duty to ensure that policyholders are not misled as to their expectations – will retail investors understand (or read!) a full hedge fund prospectus? • Sophistication of investor e.g. minimum investment levels • Other product features e.g. capital protection, diversification of portfolio with other funds etc.

10. Agenda • The Opportunity – Life Insurance Investment Vehicles • Administration Issues • Sample Case Studies • Summary

11. Administration Issues • Unit-linked investment products – administration of policyholder unit records handled by life insurer • Fund administration – handled by fund manager, life insurer (notional) internal fund holds units in external fund • Unit pricing – internal fund unit price calculated by life insurer, may be special issues if performance fees apply • Cooling off provision – investment process needs to allow for possibility of early cancellations

12. Unit Pricing • Equity between policyholders must be considered, particularly where performance fees apply • Various mechanisms possible • Life insurer is legal owner – individual policyholder transactions netted off against each other for trading purposes

13. Agenda • The Opportunity – Life Insurance Investment Vehicles • Administration Issues • Sample Case Studies • Summary

14. Case Study A • Life insurer currently offering a single premium product with a hedge fund investment option • Minimum investment of €63,500

15. Case Study B • Personalised portfolio bond specialist selling from Dublin into several EU member states • Minimum investment varies by country of sale • Hedge funds allowed at request of investor subject to meeting regulatory requirements and due diligence of life insurer • Investors must sign a special declaration acknowledging risks involved

16. Case Study C • Structured product provider currently selling into 6 EU countries:UK, Italy, France, Germany, Spain, Belgium • Products typically offer full capital protection • Manufacturing managed centrally in Dublin with packaging handled locally

17. Case Study D • Large Dublin based cross border life insurer with strong retail distribution • Currently developing product with 25% hedge fund link and capital protection • Minimum investment likely to be €25K

18. Agenda • The Opportunity – Life Insurance Investment Vehicles • Administration Issues • Sample Case Studies • Summary

19. Summary • Retailing of hedge funds is attracting greater interest • Life insurance products provide one vehicle to retail hedge funds or variations thereof • Life insurance products can also be easily distributed on a pan European basis • Hedge funds may require additional disclosures and health warnings over and above normal consumer protection measures