Tue, Sep 2, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Laven Partners remains hopeful for a final AIFM Directive text soon

Monday, June 21, 2010
Opalesque Industry Update – The process of the 'Trilogue', which consists of discussions between the European Parliament’s Committee for Economic and Monetary Affairs (Econ), the Economic Financial Affairs Council (Ecofin) and the European Commission, has officially began and will eventually aim to combine the two versions by Econ and Ecofin proposed on 17 and 18 May respectively.

The two drafts differ in some areas, for example the Econ version requires non-EU based fund managers to comply with various standards in order to market their funds to EU investors, whereas Ecofin suggests that national regulations should apply. Both Econ and Ecofin have softened their stance on leverage controls, and managers would be able to set their own leverage limits as long as they report to national regulators. The Directive has also been softened in relation to portfolio company disclosure requirements as now firms with fewer than 50 employees would be exempt from disclosure rules.

The most recent versions of the Directive by both Econ and Ecofin include new measures concerned with remuneration, which have been taken directly from the banking directive and have been deemed by many as inappropriate when applied to hedge funds. The funds that are significant in terms of their size will be required to have a remuneration committee chaired by a non-executive member of the management body.

The AIFM Directive will introduce powers and duties for a new centralised European regulatory authority called the European Securities and Markets Authority (ESMA), which will start work on 1 January 2011. The creation of the new body was agreed on 23 September 2009 and ESMA will be able to issue guidelines to national regulators on how to monitor conformity with the Directive, hence transforming the financial markets legislation to a supranational level! This will probably add a layer of interpretation which will not be welcomed by managers unless it is seamless.

Laven Partners recently met with Conservative MEP Syed Kamall to discuss the ongoing developments in the negotiations between Ecofin and the European Parliament. Mr. Kamall who is showing a strong understanding of the issues and has the interest of London and its service industry at heart, stressed that Ecofin is well equipped to carry out technical discussions based on facts and practicalities as some members are seconded from the national regulators, and we remain hopeful for a final AIFM Directive text soon.

At the recent Hedge Fund Operations Conference attended by Laven Partners a number of speakers suggested the industry might end up in the “Fortress Europe” and “Prison Europe” situation, where the non-EU based alternative managers will not be able to market their funds in the EU and likewise EU residents will not be able to buy offshore funds. The majority view remains that the Directive would serve as a vehicle to force hedge funds to sign up to UCITS III structures. It appears that the patience of some of the industry lobbyists has been exhausted. Javier Echarri, the secretary general at the European Private Equity and Venture Capital Association (EVCA), will leave the organisation at the end of the year, or sooner if the AIFM Directive is voted through before that. Although the Directive was not cited as the reason for his departure, some may say it marks an end of an era for EVCA.

The move towards more UCITS III structures is certainly not the solution, as it is simply not compatible for some strategies and will lead to more correlation between investment styles which no doubt kills off any idea of being an ‘alternative’ fund. One might also consider whether tighter regulation is needed to protect investors from themselves. A recent survey by the European School of Management and Technology together with the Rotterdam School of Management has produced evidence that investors systematically allocate money to hedge fund investment styles that have performed well over the previous three quarters without regard for any change in the level of risk. This implies that investors are still simply chasing the best past performance rather than assessing the risks of different investment strategies.

Eurozone’s fiscal deficit crisis affecting the AIFM?
Germany has recently emerged as the world’s financial reformer and introduced a number of measures to curb the misbehavior of financial institutions. The decision on 19 May to ban naked short-selling in Germany sent a strong message of tougher regulation and was reiterated with an enigmatic quote by the country’s finance minister Wolfgang Schäuble: “If you want to drain a swamp, you don’t ask the frogs for an objective assessment of the situation”.

This contradicts with the notion that Europe should be regulated as one market, further highlighting that one Directive equally regulating the overall European market is virtually impossible. The view that the new rules should be defined on a European level and not by nation states was reflected by the EU Competition Commissioner Joaquin Almunia, who encouraged governments “to adopt such decision at a European level, not on unilateral basis”.

In the past month Germany also announced plans for a levy on banks, which would be paid into a fund to cover the costs of future financial crises. There were also further calls for a potential global regulation tax. German Chancellor Angela Merkel is hoping to achieve mutual regulatory objectives at the G20 summit in Canada on 26-27 June: “We will campaign for a tax on financial transactions. It is clear that this is something that will not be agreed at our first dinner. But I don't think it would ruin the financial markets if we found agreement on a global tax”.

Nevertheless, as the Economist suggested, these events shaded into the background, and instead of worrying about the Eurozone crisis, the Econ and Ecofin “thought their time would be well spent agreeing on tough new rules for an industry that has had remarkably little to do with the financial crisis.”


Laven Partners is a global consulting group focused on the alternative investment industry that offers structuring, regulatory compliance, legal and tax services to asset managers. www.lavenpartners.com


Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing
  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Study shows what resonates with investors: 'Unwavering', 'passionate' beats 'committed', 'dedicated' and more surprises[more]

    Komfie Manalo, Opalesque Asia: A new study by Pershing, a unit of BNY Mellon company, showed that an effective value proposition strengthens audience connections and fosters growth, yet many advisors have had little objective guidance in formulating such statements until now. In the study

  2. Comment – Why you should avoid the hottest hedge fund hands, Swedroe attacks Hussman over risk management, relative value strategy[more]

    Why you should avoid the hottest hedge fund hands FromCNBC/Yahoo.com: Investors who don't have money with Pershing Square Capital Management are likely salivating at the hedge fund's industry-leading 26 percent return from January through July. But investing with Bill Ackman and other to

  3. Managed futures' global diversification is important in next phase of economic recovery[more]

    Komfie Manalo, Opalesque Asia: The global diversification provided by managed futures may prove to be extremely valuable as the markets enter the next phase of the economic recovery, said Campbell & Company, a pioneer in absolute return invest

  4. Ex-UBS prop trader's hedge fund Manikay Partners eyes UK launch[more]

    From eFinancialnews.com: Manikay Partners, a $1.7 billion US multi-strategy hedge fund set up in 2008 by a proprietary trader from UBS with backing from Goldman Sachs, is planning to open in the UK. New York-based Manikay's move into Europe comes after Financial News revealed on Monday that Aurelius

  5. Big hedge funds tighten grip amid consolidation[more]

    From Asianinvestor.net: The hedge fund industry consolidated last year with the number of funds falling by around a tenth from 2012 but assets under management rising $248.8 billion to $2.6 trillion, finds a new report from research firm eVestment. Firms with more than $1 billion in hedge fund A