Any hedge fund, private equity or real estate fund wishing to market its product in the European Union will, from this week, need authorisation under the Alternative Investment Fund Managers directive. To the accompaniment of grumbling and complaints about overburdensome regulation, the alternative investment industry has reluctantly lined up and complied.
There is even some evidence that it is costing less than previously expected. Despite all this neat toeing of the line, which would imply business as usual once the forms are all filled out and the reporting software bedded down, some industry commenters predict that what happens next could alter the business structure and practice of hedge funds at a fairly basic level.
“The one thing I think has really changed with this legislation is the way they are forcing risk management on to the board,” says Peter Cripwell, chief executive of RiskSystem. Among hedge funds, risk management has typically been a relatively low status job, explains Mr Cripwell, who used to be chief investment officer for Pioneer Alternative Investments, a $1.5bn hedge fund manager. “The risk manager is either going to be getting a big pay rise or they’ll have to hire someone new.” An insider promoted to board level may well be deemed to have insufficient independence, while hiring a new risk manager with sufficient clout and experience could be expensive, as there is suddenly increased demand for such skills. “
The most direct consequence is likely to be people spending more in this area,” says Paul North, head of product for Europe, the Middle East and Asia at BNY Mellon. “Hedge fund managers are very good at risk management in the investment function, but this is a much broader requirement.” Managers will need to show that their risk function manages counterparty, liquidity and operational risk, as well as the investment risk traditionally the main focus of such functions. It will also have to be hierarchically and functionally independent of the portfolio management teams. “We see a lot of clients asking ‘What are other people doing?’,” says Mr North. “What best practice may be is still evolving.” Managers from outside the EU are also keeping their powder dry as they wait to see how the new regulatory framework develops in practice. “It will be easier when there’s more clarity,” says Stuart Kaswell, general counsel for the US Managed Funds Association, a trade body for hedge funds. “Nobody wants to get on the wrong side of this.
” Not everybody is staying calm and carrying on, however. A lawyer at a large US law firm, who requested anonymity, says: “There have been delays [with authorisations] and the system has gotten clogged up. Trying to get responses from the [UK’s Financial Conduct Authority] is a nightmare. AIFMD is not a very satisfactory piece of legislation. It was an emotional response to the perception that hedge funds caused the financial crisis.” The lawyer adds that reporting requirements “are a really big deal”, to the extent that a dedicated full-time employee is needed to ensure compliance with them. “US managers are not used to [fundraising] being more difficult in Europe and some are in denial. [Others] are asking why there is discrimination against them. Some have taken Europe off the agenda as it is too much of an issue [as AIFMD] might be a nightmare,” he says.
"Of the people we know, they did get their applications in on time," said Ashley Kovas, head of funds at regulatory consultancy Bovill Ltd., who previously worked at the U.K. financial regulator.
"A significant number. went into the FCA on Monday." While the precise deadline for applications varies from country to country, Tuesday marked the end of a one-year transition period and the start of the period when managers must comply with a list of AIFMD policies in areas ranging from asset valuation to dealing with conflicts of interest and risk management. Even if a manager already had such policies in place, many will have to be tweaked to fit the new rules. Managers will also have to submit regular, detailed reports to regulators, a requirement that will be "quite a significant burden for many firms", according to Bovill's Mr. Kovas.
The end of the transition period marks the latest stage in a long-running battle between European regulators and the hedge fund industry over the best way to regulate the secretive industry after the financial crisis. U.K.-based hedge fund managers have long argued that banks, rather than hedge funds, were at the center of the financial crisis and that existing regulation by the FCA was adequate. All sections of the industry now must come to terms with the as-yet untested regulations. AIMA said areas of AIFMD, such as rules about marketing funds, were being interpreted differently in different countries.
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