GAIM Ops Cayman: A summary
Here is a summary of the key points at GAIM Ops Cayman, which was held at The Ritz Carlton Hotel between April 7 and April 9.
AIFMD: Very few US managers appear to care about the Alternative Investment Fund Managers Directive (AIFMD). Most are simply electing to rely on the yet-to-be-properly defined concept of reverse solicitation so as to circumvent full compliance with the Directive. Nonetheless, US managers relying on reverse solicitation have been warned they must rigorously document all communications with EU investors if they do not want to incur the wrath of regulators. “The likes of Paulson & Co can rely on reverse solicitation because investors know who they are and their reputation so will be calling them up at their own will. The challenge will be for the sub $1 billion firms who do not have the brand appeal,” says one investor. Those firms considering marketing to EU investors via the national private placement regimes have been advised to get to grips with the restrictions individual member states have in place so as not to fall foul of the rules. Some member states such as France and Germany are adopting a tough stance on private placement while others such as the UK are pursuing a more liberal route. Despite much hype about US managers exiting the EU altogether, this does not seem to have materialised. A panel on depository liability was reasonably well attended. Fears that depository liability is going to be prohibitively expensive were flatly dismissed. “While the pricing is yet to be determined, the cost of the service will be commoditised over time and will become an incremental fund expense,” says one consultant. Perhaps the most interesting AIFMD story to come out of the entire conference was the complete disinterest US firms have in the Directive.
Liquid Alternatives: The growth in liquid alternatives such as ’40 Act hedge funds is well documented. Citi Prime Finance predicts $939 billion will flow into liquid alternatives by 2017, while Barclays Prime Services is forecasting the sector could control between $650 billion and $950 billion by 2018. While the liquid alternatives space grew 43% in 2013, it still remains in its infancy, and accounts for just 1%, or $137 billion of the $13.2 trillion presently controlled by the entire US mutual funds industry. Panellists highlighted ’40 Act structures present operational challenges, particularly around meeting the onerous liquidity terms. One fund of hedge funds executive urged managers to ensure no conflicts of interest would arise between their private funds and 40 Act offerings. 40 Act hedge funds are subject to onerous restrictions. The absence of leverage (capped at 33% of gross assets), lack of performance fees (with a management fee of between 70 basis points (bps) and 1%), restrictions on investing in illiquid assets (capped at 15% of AuM), rigorous corporate governance standards and mandatory third party custody will all lead to higher compliance costs, at a time when profits are rapidly receding.
JOBS Act: Hedge fund managers are still reluctant to take advantage of the liberalised advertising and marketing rules following the passage of the JOBS Act, according to panellists speaking at GAIM Ops Cayman. “One of the biggest concerns managers have about the JOBS Act is that nobody wants to be the first mover. No hedge fund wants to face scrutiny from the Securities and Exchange Commission (SEC) for being the first mover,” says one chief operating officer at a major fund management house. The SEC is demanding managers ensure their investors are accredited (defined as an individual with $1 million or more in investable assets) and submit marketing materials to the regulator to mitigate the risk of fraud. Understandably, managers are slightly alarmed at this regulatory intrusion as is evident by the lack of firms aggressively marketing their products. A survey by Aksia found just 1% of hedge fund managers intend to advertise their vehicles because of the JOBS Act while approximately a quarter said they would “wait and see”, and 73% said they would not take advantage of the liberalised marketing rules.
FATCA: The rules are fast approaching and managers were advised to register for a Global Intermediary Identification Number (GIIN) with the Internal Revenue Service (IRS), appoint a FATCA case officer and conduct thorough due diligence on underlying investors. Despite the imminence of FATCA, managers appear woefully underprepared. A paper by SEI - As FATCA Deadlines Loom, What Managers Need to Know - found 48% of managers were unaware of the then April 25, 2014 deadline (this deadline has since been extended to May 5) by which Foreign Financial Institutions (FFIs) are required to register for a GIIN with the IRS. More than one third of respondents had yet to establish a plan on dealing with investor due diligence although 67% said they would have completed this task ahead of or by the FATCA deadline. However, this might be a somewhat optimistic projection given that 41% of managers were undecided as to whether they could rely on existing due diligence documents or obtain new W-8 and W-9 forms from investors. COOConnect will be hosting a webinar on FATCA. The details of which can be found here.
Regulators and enforcers getting tougher: Representatives from the FBI and US Attorney’s Office for the Eastern District of New York warned attendees that they will be aggressively pursuing managers found to be in violation of the Foreign Corrupt Practices Act (FCPA). Managers were advised to be careful when appointing third party marketers in countries where corruption is a way of life. However, these enforcement agencies are going to adopt a proportionate approach towards their enforcement of the FCPA. The FBI officer added government agencies across the world were working together much more closely in their clampdown on insider trading. One panellist highlighted the significance of the new whistle-blower rules in place in the US whereby informants receive a percentage of the total SEC fine. Managers were again advised to tread carefully with colleagues and not share too much information about their businesses with spouses, or worse ex-spouses.
Corporate governance: It would not be GAIM Ops without a session on corporate governance. There was much fanfare in 2013 when it appeared the Cayman Islands Monetary Authority (CIMA) would introduce corporate governance reform - possibly the creation of a searchable database identifying directors – something that would have made operational due diligence on directors far less cumbersome. Very little seems to have happened since 2013 although that is not to say changes will not be introduced. A panel debate on corporate governance urged for greater transparency and a reintroduction of annual general meetings (AGMs) at hedge funds. While this is admirable, it is unlikely to materialise. There was criticism in some quarters that the corporate governance argument has become laborious and one irked delegate pointed out investors unhappy with the quality of their directors should simply pull their money from those hedge funds, something the overwhelming majority of investors are not doing.