Long the dominant force in Europe’s cross-border fund industry, Luxembourg is now pivoting towards alternative investments as the asset management landscape shifts. With active fund strategies losing ground to passive mutual funds and ETFs, the Grand Duchy is looking to cement its position as a hub for private credit, real estate, and private equity.
Industry leaders, including Riccardo Lamanna, a senior vice president at State Street and Luxembourg country head, say the transition is both a challenge and an opportunity—one that will require regulatory agility and a sharpened focus on innovation.
The country faces headwinds as investors increasingly favour passive mutual fund and ETF strategies over active management. Lamanna acknowledges the challenges but sees opportunities for the Grand Duchy to evolve.
«Luxembourg’s Ucits market peaked several years ago,» says Lamanna. «With rising interest rates, investors have shifted from active mutual funds to passive ETFs and money markets in a classic ‹flight to quality.›»
Luxembourg’s ETF challenge
The outflows are not limited to Luxembourg. Ireland, which has become a powerhouse in the ETF space, has also seen assets decline, though to a lesser degree.
«I believe the priority in Luxembourg is to strengthen its overall attractiveness,» Lamanna said.
The Luxembourg government has introduced measures to boost ETF competitiveness, including eliminating a registration tax on active ETFs. This has prompted some asset managers to reconsider their product lineups, potentially shifting more of their ETF business to Luxembourg rather than Ireland.
«If you’re an established Luxembourg manager with existing legal entities, it makes sense to domicile your ETFs in the local market,» said Lamanna. «If regulation and taxation become more favourable in Luxembourg, managers may prefer to domicile ETFs here instead.»
State Street, which has operated in Luxembourg since 1990, is well-positioned to support such a shift. The firm has developed robust capabilities in servicing both traditional and alternative funds and sees opportunities to leverage its expertise across the spectrum.
«For us, serving an ETF in Luxembourg or serving an ETF in Ireland is largely the same,» Lamanna explains. «The technology and processes are similar. The difference lies in the client’s existing legal structure and where they choose to domicile their product.»
The rise of alternatives
Beyond ETFs, Luxembourg is also seeking to capitalise on the growth of alternative investments. The government has implemented several initiatives to attract asset managers in areas such as private credit, real estate, and private equity.
«Alternatives are a growing component in investor portfolios,» Lamanna notes. «The democratisation of these strategies, through semi-liquid products, is an interesting trend we are closely watching.»
Segregated mandates
The rise of segregated mandates, which allow for more customised portfolio construction, is another development that could play to Luxembourg’s strengths. Unlike pooled investment funds, where multiple investors share the same portfolio, segregated mandates are tailored investment strategies managed for a single investor or institution. These mandates provide greater flexibility in asset allocation, risk management, and investment objectives, making them particularly appealing to institutional investors such as pension funds and insurance companies.
Lamanna sees potential for technology to make these solutions more accessible to a broader range of investors beyond the ultra-high-net-worth segment.
«Segregated mandates offer the same benefits as funds—diversification, protection, and good regulation—but in a more tailored package,» he says. «They allow investors to have more control over their asset mix, fees, and risk exposures. Technology is evolving to make this model more feasible and efficient, lowering barriers to entry for a wider range of investors.»
Balancing growth with regulation
Underpinning Luxembourg’s efforts is a focus on maintaining its reputation as a well-regulated, stable financial centre. Lamanna acknowledges that the country must balance its ambition to be «best in class» with the risk of over-regulation.
«There is always a fine line between setting high standards and ensuring we remain competitive,» he explains. «We want to avoid any perception that Luxembourg does not play by the rules, but at the same time, excessive regulation could deter innovation.»
As Luxembourg navigates these challenges, State Street remains committed to the market, seeing it as a crucial hub for both traditional and alternative asset management. The firm’s long-standing presence and deep expertise have positioned it to support the Grand Duchy’s evolution.
«Luxembourg is shifting gears,» Lamanna concludes. «There is renewed optimism, and the government is putting the right pieces in place. It is an exciting time for the market.»