The Alternative Investment Fund Managers Directive (AIFMD) is now a fact. Like death and taxes, it is here. Only time will disclose whether its provisions will bear lightly on alternative managers, or slump heavily on all that they do, crushing the energy and creativity on which progress in investing depends. What is worrying is the palpable relief that the Directive is not more hostile to alternative investing than it is. Among lobbyists, there is even a measure of self-congratulation at the success of their campaign to emasculate its grandest ambitions.
This is misplaced, and not only because the AIFMD will spawn successors which are bound to be less agreeable. Its cousin, the near 30-year-old Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) is already planning its sixth iteration. The European Securities and Markets Authority (ESMA) is scheduled to review the workings of AIFMD I between 2015 and 2018. If that review intensifies the role of depositaries, or broadens the range of individuals that must disclose and withhold remuneration, it will mark only modest adjustments to the two most contentious aspects of the AIFMD. A better reason to fear complacency is the conclusions that ESMA might draw from an analysis of the reports that regulators will now receive. Managers that complete Annex IV will be sharing with regulators details of all of their funds, the strategies they pursue, their assets under management, the markets and countries and instruments and currencies they trade, the volumes of business they transact, the returns they have earned, the names of the prime brokers they use, their sources of capital and of finance, their largest market and counterparty exposures, where their risks and investors are concentrated, what stress tests they have conducted, the size of their short positions, the value of the securities they have borrowed, the degree of leverage incurred, the volatility of their funds, the value of any collateral paid or received or owed, subscriptions banked and redemptions paid, the lock-ups they demand and the liquidity they guarantee, and even the contents of the side-letters they have written.
The fatal conceit of this regulation, as of all regulation, is the belief that, if enough information is abstracted from market participants, the current and future course of markets can be fathomed. Even if regulators can reduce the contents of thousands of Annex IVs to a comprehensible form, their powers of reasoning will be inadequate to the task. It requires a form of pre-cognition to grasp as well the information collected and processed by the markets themselves. But this will not inhibit the regulators from using the data to persuade themselves that a crisis of intervention is in fact a crisis of finance-capitalism. The only policy worse than one uninformed by any data at all is one informed by data which belongs to regulators only.
There is a third reason to fear complacency about the AIFMD. This is the unspoken acknowledgement of both fund managers and investors, much encouraged by increasingly lavish fines for even inadvertent breaches of compliance, that giving regulators what they want is all but the whole duty of the sell-side of the industry. It is in the nature of any sizeable organisation that it will excel at implementation rather than adaptation. Complaints about the utility and propriety of regulation have long since yielded to demands for more clarity and concision. What exactly, bankers and fund managers are asking of the regulators, would you like us to do? In the artificial circumstances of current market conditions, in which monetary policies of extraordinary extravagance have obliterated all conventional measures of value, execution of the plans of regulators is merely one example among many of the misallocation of resources. When the natural liberty of the markets is restored, obedience to the hierarchy will be even less virtuous than this.