ALFI Luxembourg 2012: A Summary
Here are some of the key points from ALFI, which took place in Luxembourg between November 20 and 21.
Luxembourg post AIFMD: Rarely does a single issue dominate a conference agenda so markedly, and for good reason. AIFMD is a topic that cannot be ignored in Luxembourg purely because the country is in such a perverse situation. Optimists point out AIFMD with its private placement regime and passport will herald an influx of onshore managers to Luxembourg. Its highly regarded regulatory regime and burgeoning service provider community, will undoubtedly be major benefactors of this. Conversely, others speculate AIFMD with its depositary costs, will make private placement and passporting opportunities an ineffective carrot and will facilitate a move offshore. Given the retreat of European investors from hedge funds, the latter argument appears to hold more sway. Until the final rules are clarified, this speculation will continue.
Depositary liability remains a bone of contention. Depositaries including BNY Mellon and BNP Paribas expressed alarm at tweaks to the Level 2 rules, which will force them to “implement” cash flow monitoring as opposed to just “ensure” it. This subtle variation of wording will require depositaries to act as secondary fund administrators to help mitigate the risk of fraud and errors at managers. Aside from staff and technology costs (which will ultimately be borne by clients), implementing cash flow monitoring might be nigh on impossible to apply to some strategies, particularly high-frequency traders. Derivatives will also be problematic for depositaries as they are netted off and traded with multiple counterparties making it difficult for depositaries to confirm the accuracy of cash transactions. Depositaries are resigned that regulators are unlikely to budge on this issue. “The regulation will remain,” said Chris Adams of BNP Paribas Securities Services.
Depositary agreements between fund managers and depositaries outlining terms and conditions are unlikely to be ready by July 2013. These documents have never been drafted before while one depositary speculated there were not enough lawyers to handle the workload. One depositary said it aimed to get agreements to clients by Q1 2013 and was confident managers would meet the deadline. Another depositary was more foreboding acknowledging the agreements would not be signed in good time. The depositaries complained the rules had still not been finalised thereby delaying work on the agreements.
Funds of Funds in Europe whose investments are registered in the name of a depositary rendering the assets as being held in custody could struggle to find a depositary if some of their underlying managers adopt high risk strategies. Depositaries are liable for any losses or frauds at funds of funds’ underlying investments, which could force risk-averse depositaries to shun certain funds of funds. Talk about depositaries avoiding single managers in emerging or high risk markets has been exaggerated, according to HSBC Securities Services. HSBC said it had undertaken extensive research and only two markets were likely to be impacted, although it did not say which ones.
AIFMD delays: Delays to AIFMD are troubling. The rules are expected to be published in December giving market participants, particularly depositaries, precious little time to meet their compliance obligations. The FSA consultation paper on the Level 1 rules has confirmed existing hedge fund managers will be granted a 12 month grace period until July 2014 to meet all of the requirements. Managers launching after July 2013 will not be afforded this luxury. Most delegates predict the rules will be published before year-end, most likely in mid-December. One delegate predicted albeit cautiously it would be more imminent. “I believe it will be next week as there are noises coming out of Brussels. However, I said the same thing in June.”
Misconceptions about hedge funds: Dominic Tonner, AIMA’s communications manager, addressed some of the many popular misconceptions about hedge funds despite being allocated just 35 minutes. Among the industry association’s gripes were deep rooted fallacies that hedge funds are systemically important, unregulated and high-risk. He also acknowledged the futility of short-selling bans and dismissed claims that hedge fund indices overstate returns, a central argument in Simon Lack’s Hedge Fund Mirage. Tonner referenced KPMG and AIMA research carried out in conjunction with Imperial College London, which concluded hedge funds had outperformed traditional asset classes such as equities, bonds and commodities over the last 17 years. To counter the embedded mistrust about hedge funds among the general public, AIMA is considering creating a website explaining how alternatives work in Layman’s terms. Changing public attitudes towards hedge funds will not be a quick and easy fix but a long-term effort. This website, should it ever materialise, is a move in the right direction.
Revitalising Europe: Roger Havenith, head of unit at the EU Commission, outlined plans to partner with private firms such as venture capital, to boost growth in the regional bloc. Recognising that curbing government debt while meeting obligations to boost infrastructure spending were not entirely compatible, Havenith proposed greater public-private cooperation. He said the European Commission would put more money into venture capital firms to meet funding requirements for small and medium sized enterprises. This, he said, would help curb European Commission spending. The irony of an EU Commissioner exhorting the benefits of alternatives was not lost on delegates.
Overall: Attendance at ALFI has always been solid although 2012 was a bumper year. Organisers said there were 550 registrations, of which roughly 500 actually attended. Attendees were predominantly service providers and very few fund managers were present. Delegates said the panel titled “The Future World of Prime Brokerage” hosted by Jerome Wigny, partner at Elvinger, Hoss & Prussen, was the standout event on Day 1 while “Practical Consequences of AIFMD” featuring HSBC’s Bill Scrimgeour and Jean-Michel Loehr of RBC Investor Services generated significant interest on Day 2. Nonetheless, some delegates did complain a few sessions were rather dry, evidenced by the abundance of attendees reading Blackberries or in one case playing “Hungry Birds.”