As the premier location in Europe for the administration of alternative investment funds, Ireland is the natural home of GAIM Ops, the leading conference for operational leaders in the alternative investment management industry. COO editor Charles Gubert attended the 2014 event at Powerscourt House in Dublin in October this year. This is a summary of what he found out.
• The Central Bank of Ireland has said that fund passport schemes in Asia (namely ASEAN and APEC) could pose a threat to the ability of UCITS managers to penetrate the Asian market, whose investors have historically been significant buyers of UCITS. In addition, the mutual recognition scheme between Hong Kong and China, whereby fund managers in Hong Kong can market to mainland investors, could be an exciting opportunity for UCITS and Ireland. Its expansion beyond Hong Kong is a point made in a recent paper by HSBC, although the bank is sceptical that the scheme will be extended beyond Singapore and Taiwan. HSBC said that, while Luxembourg and Ireland were contenders for mutual recognition, the whole mutual recognition scheme could just be a ploy to prevent the spread of UCITS in China.
• There is a mixed standard of answers to operational due diligence (ODD) questionnaires completed by hedge fund managers. Some managers are only willing to provide four or five pages of answers, whereas some span up to 60 pages. This lack of transparency was not looked kindly upon by investors. While many investors said they would provide constructive feedback, this is generally not what happens in reality.
• Regulatory reporting is causing a headache for smaller managers. Annex IV of the Alternative Investment Fund Managers Directive (AIFMD) is a one-size-fits-all document that is proving a particular challenge. On Annex IV, managers have been advised to start collecting static data from service providers to populate the document, as it is inevitable there will be a rush to file the document come the end of the first large scale reporting deadline of January 2015. Service providers report most managers have devoted scant attention to the Annex IV document. This was especially true of US managers.
• US managers keep saying they will use reverse solicitation to circumvent compliance with AIFMD marketing restrictions, or ignore the European institutional market altogether. Reverse solicitation is widely agreed to be a risky approach. One lawyer reckoned a European regulator will make an example of a manager found to be breaching the rules at the first opportunity that presents itself, simply in order to send a message to the rest of the industry. One anecdote told at the conference involved a US fund manager claiming to be relying on reverse solicitation while simultaneously hiring an EMEA head of business development and marketing.
• There is debate as to what sort of fund structure US managers should use when launching funds in Europe. Most managers are adopting a “wait and see” approach towards launching a fully compliant AIFM, chiefly in order to work out how accessible and valuable an EU-wide marketing passport will be. There are also reports of an increase in US managers launching parallel UCITS structures to complement their offshore vehicles.
• The future of prime brokerage was discussed. Basel III capital requirements are going to make it substantially harder for prime brokers to finance clients by re-hypothecation. As a result, financing will become scarce. This could result in hedge funds scaling back the number of prime brokers they use, perhaps precipitating awkward conversations with investors about concentration of counterparty risk. The investment strategies most likely to suffer are those that require high leverage, such as fixed income relative arbitrage. Investment banks are already culling relationships with hedge funds deemed to be unprofitable. The entire prime brokerage business is likely to undergo enormous structural changes. Smaller managers, and those pursuing strategies dependent on leverage, are likely to suffer disproportionately.
• One panellist said alternative sources of lending would be available to hedge funds. He argued firms not regulated under Basel III, but sitting on cash deposits, would lend to hedge fund managers. He added that private equity was another candidate to borrow from these banks. Naturally, the prime brokers said they had not seen any viable alternative lenders yet, and one warned against entering their territory on grounds prime brokerage is technologically and financially demanding.