Fears Grow Over AIFMD for U.S. Hedge Funds
U.S.-based hedge funds are being warned over the potential implications of new hedge fund regulation emanating out of Europe.
The European Union’s Alternative Investment Fund Managers Directive (AIFMD), which is the EU’s first attempt at governing the hedge fund and private equity sectors, is set to come into force from July and non-EU hedge funds with products in Europe will be forced to adhere. Initially, this will be a phased-in approach dependent on domicile and on the distribution of the AIF.
“With the onset of AIFMD, managers can anticipate a variety of changes that will characterize the alternative investment industry,” said Jessica Sipprelle of Eze Castle Integration, a provider of IT services to hedge funds, in a recent blog posting.
“Beginning on July 22, U.S. managers marketing an EU AIF or a non-EU AIF in an EU state under national private placement regimes must satisfy certain transparency and reporting requirements.”
These include making disclosures to their investors pre-investment; publishing an annual report for the pertinent AIF; and reporting to national regulators in the countries that AIF is being marketed into.
Non-EU alternative investment fund managers are also likely to be subject in full to the stringent AIFMD guidelines—if they are using passport agreements—after a transitional period. When the AIFMD was first mooted back in 2009, the directive was heavily criticized for its potential to stifle Europe’s fund management industry. But the industry in Europe now appears to have taken a stance of muted acceptance and a desire to work with authorities to make the best out of the situation.
“The AIFMD is a complex regulation,” said Sipprelle.
With the directive currently being transposed into national law around the EU, non-EU managers are facing even greater uncertainty as they will soon have to adhere to national private placement regimes to continue to distribute their non-EU alternative investment funds within the EU once the AIFMD is up and running.
And a formal co-operation agreement will be needed between the regulator of the fund’s home jurisdiction and the EU country into which the fund is to be distributed—which is raising some concerns.
“Only Switzerland and Brazil have so far established co-operation agreements,” said Yoon Ng, associate director at Cerulli Associates, a research firm specializing in the asset management industry.
“The jury is still out on whether there will be an exodus of Swiss hedge fund managers to EU jurisdictions, but feedback from local fund groups indicates that the Swiss regulator has probably done enough to ensure Switzerland retains its appeal as a hedge funds center.”
Ng says that the U.S. is currently in negotiation with the EU, but it remains to be seen whether co-operation agreements will be in place for July, with U.S. managers appearing to be in the dark about the work required to ready themselves for the new regime. They are also being urged to act now as the penalty for non-compliance with the directive is likely to be severe.
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.