Fund managers and analysts are expecting a wave of onshore long/short equity hedge funds to be launched in Italy next year, to the tune of at least EUR3 billion (USD2.7 billion), which is likely to lead to increased demand for over-the-counter equity derivatives. Alternatives manager Kairos Partners, with EUR1.5 billion under management, has applied to the Banca di Italia for permission to launch Italy's first onshore single-strategy fund. The fund would use OTC derivatives to buy and sell stocks, for example it would buy put options as a way to short stocks, said Guido Brera, risk manager in Milan. He expects the fund will receive approval and be launched within three months. Brera said the fund will probably have around EUR550 million under management.
Regulatory approval is expected to unleash a host of similar funds from up to a dozen fund managers, according to a prime broker in London. Ersel Hedge, with EUR300 million under management, and Pioneer Alternative Investment Management, a fund manager with EUR400 million under management and owned by UniCredito Italiano, are two funds keeping a close eye on the situation. Ersel Hedge is considering making its first investments in OTC equity derivatives next year for a long/short European fund. "We would be using derivatives to hedge our exposure and they can either be exchange-traded or not," said Andrea Nasce, cio in Turin. The fund would likely be in the range of EUR100-200 million, though Nasce stressed the alternatives manager, which runs five funds of funds, has not yet applied for approval. To date, Ersel's only use of derivatives has been in the foreign exchange options market, which it uses to convert the assets from the funds of funds, most of which are dollar-denominated, into euros.
Pioneer Alternative Investment Management may also increase its use of OTC derivatives. "If they approve one fund, that will open the doors and we will have some future plans for long/short funds," said Luca Roberi, a hedge fund analyst at Pioneer in Milan. Both Kairos and Pioneer already use OTC equities for their offshore funds.
Hedge funds need approval because onshore funds must use a local custodian under Italian law, yet local banks do not have prime brokerage capabilities, according to the fund managers. However, hedge fund managers are hoping this restriction can be satisfied by foreign banks with prime broker facilities that also own Italian subsidiaries, such as Deutsche Bank.
