The Cayman Islands are still the predominant domicile for hedge funds, according to a survey of European hedge fund managers by Citigroup.

There is no widespread move to re-domicile funds onshore ahead of final clarity on the Alternative Investment Fund Managers Directive.

Onshore Ucits launches are prevalent among the larger managers, but still account for a small portion of overall hedge industry assets.

There is ongoing demand for managed accounts, particularly from large institutional investors. Operational complexity is increasing as hedge fund managers offer a variety of products spanning traditional offshore domiciles, managed accounts and onshore domiciles.

The managers interviewed are keeping fully abreast of the AIFMD and other regulatory developments. Most, however, are adopting a wait-and-see approach to the Directive prior to making any significant changes to their business models.

Marketing and fundraising activities have been stepped up across the board with many managers adding staff and infrastructure. The successful marketing of Ucits brings additional costs and requires the maintenance of distributor relationships.

Capital-raising continues to be difficult and time consuming, according to the survey. Investors are intensely focused on due diligence and require the active participation of hedge fund managers and their service providers. Investors in hedge funds run by European managers generally expect an external and independent administrator.

Investors value transparency, although their requests are generally seen as sensible — for example, FAS 157 (fair value measurement) disclosures, pricing policy disclosures and feeds to risk systems for consolidation purposes. Some due diligence consultants are actively seeking standard administrator disclosures around pricing, FAS 157 and counterparty concentration. There is also some evidence of a trend towards SAS 70-style reporting for the hedge fund manager.

Liquidity continues to be a focal point, although investors generally accept liquidity terms that match the liquidity of the underlying portfolio and give a good balance between performance and the ability to access capital.

There was one overriding comment from all managers with respect to fees: investors will continue to pay for performance.