Hedge Funds in Regulatory Crosshairs

Terry Flanagan

The European Securities and Markets Authority has published final guidelines on the reporting obligations for alternative investment fund managers. Esma’s guidelines, which relate to the Alternative Investment Fund Managers Directive (AIFMD), will require hedge funds, private equity and real estate funds to regularly report certain information to national supervisors.

The guidelines clarify provisions of the AIFMD on required information, which will help to have a more comprehensive and consistent oversight of AIFMs’ activities.

Esma has also published an opinion that proposes introducing additional periodic reporting including such information as Value-at-Risk of AIFs or the number of transactions carried out using high frequency algorithmic trading techniques.

“One of the key objectives of the AIFMD is bringing the alternative fund world under supervision thus providing more transparency to investors and regulators,” said Steven Maijoor, ESMA chair. “As the AIFMD came into force in July, both AIFMs and national supervisors now need to prepare for their regulatory filings as it is these reports which will enable supervisors to monitor the systemic risks of AIFs. In order to achieve this objective, national supervisors should receive all the necessary information in order to ensure an appropriate overview of the sector.”

The guidelines and opinion will help to standardize the reporting across the EU. It will also facilitate the exchange of information between national regulators, ESMA and the ESRB. Managers need to report investment strategies, exposure and portfolio concentration According to the guidelines, key elements AIFs will have to report to national supervisors include portfolio concentration, including the breakdown of investment strategies, principal markets/instruments in which an AIF trades; and total value of assets under management.

In the United States, the Dodd-Frank Act directed the Securities and Exchange Commission to require registered investment advisers to maintain records and file reports regarding the hedge funds, private equity funds and other private funds they advise. The Commission implemented this aspect of the Dodd-Frank Act when it adopted a new form (Form PF) that requires certain registered investment advisers that advise private funds to report information to the Commission.

Advisers with at least $1.5 billion in hedge fund assets under management must file Form PF quarterly. Information required to be reported includes funds’ exposures, geographical concentration, and turnover by asset class (but not position-level information). For each Qualifying Hedge Fund (i.e., $500 million or more in net assets), additional information relating to each fund’s exposures, leverage, risk profile, and liquidity is required.

The SEC has begun to assess the quality of the data collected and in the coming months will develop and refine data analytics incorporating Form PF data to further the Commission’s mission, it said in a July 2013 report.

The latest wave of regulations to hit U.S. hedge funds and private equity firms is the JOBS Act, which permits funds to engage in solicitation and advertising initiatives.

However, funds will likely adopt a cautious approach out of concern of being flagged by regulators.

“You won’t see proactive marketing or advertising campaigns from anyone who is paying attention to other regulators or other jurisdictions, like the EU,” said Jeanette Turner, managing director and general counsel at Advise Technologies. “Their actions could put them in breach of other regulations and it is likely their CCO/General Counsel is too nervous about it.”

Turner added, “You will likely see these firms relax more on their communications with investors and the media, and on certain activities like sponsoring charity events, etc. You might also see more information posted on firm websites.”

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