US managers need to be less short-termist with AIFMD
US hedge funds need to adopt a less short-termist approach towards European investors following the passage of the Alternative Investment Fund Managers Directive (AIFMD).
A number of US hedge funds have threatened to pull out of the EU or return European capital so as to circumvent compliance with the Directive. “It would be short-termist for US hedge funds to totally disengage with European investors because of the regulation. Ignoring European investors simply to avoid their AIFMD obligations would leave US managers in a weaker position when it comes to building a diversified investor base,” said Gavin Rankin, head of managed investments for Europe, Middle East and Africa (EMEA) at Citi Private Bank in London.
A Deutsche Bank Markets Prime Finance survey of 44 chief operating officers at hedge funds with collective Assets under Management (AuM) of $325 billion in the US and Europe found 90% of US managers were either undecided or uninterested in AIFMD compliance even if the marketing passport was extended to non-EU hedge funds. One consultant at a US prime broker said managers saw AIFMD compliance as an “avoidance exercise.”
US hedge funds, having previously assumed AIFMD applied only to EU funds until relatively recently, have expressed alarm at some of the provisions they have to abide by should they choose to market into Europe. Forty-four per-cent of US respondents not actively marketing into the EU told the Deutsche Bank survey that the reporting obligations through Annex IV was the biggest reason behind their decision , followed by the remuneration disclosure rules (31%).
Some non-EU hedge funds are instead simply refocusing their marketing efforts on the US, which is where the majority of hedge fund assets are derived from. A study by Barclays Prime Finance, for example, revealed 58% of hedge fund assets originate from North America, while Europe accounts for 24%. “US hedge funds need to be open. While the majority of asset-raising is clearly coming from the US, managers do benefit from having a diverse set of investors from different sectors and geographies. Recent experience teaches us it is ill-advised to have all of your eggs in one basket,” said Rankin.
Rankin highlighted US firms initially complained about regulatory reporting rules introduced under Dodd-Frank, namely the submission of Forms PF and CPO-PQR to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) respectively, but have since acclimatised to these challenges. “If we look back a few years, managers were complaining about Form PF and the onslaught of regulatory reporting in the US. Nowadays, it comes naturally to them. I believe the same will happen with AIFMD. Furthermore, it is likely AIFMD will not be the last piece of regulation to impact the hedge fund industry,” he said.
Many non-EU funds are alarmed at the costs of AIFMD compliance at a time when other regulatory and operational overheads are mounting amid receding profits. BNY Mellon recently estimated the initial AIFMD set-up costs would be anywhere between $300,000 and $1 million. This and the continued regulatory uncertainty is causing many non-EU firms to adopt a “wait and see” approach towards AIFMD compliance.