When it hits the fan: Are hedge funds prepared to deal with the AIFM?
The EU’s Alternative Investment Fund Managers (AIFM) directive was passed on November 11 by the European Parliament. Charles Gubert speaks to Amanda Rowland, an asset management regulatory partner at PricewaterhouseCoopers (PwC).
Do you believe that hedge funds are prepared to deal with the AIFM?
Rowland: Existing hedge fund managers have until the beginning of 2014 to be authorised, compliant and fit for purpose as it were. Are they ready yet? The answer is clearly not but they don’t need to be for a little while. Are they thinking about the impact of the AIFM and giving it enough attention? Some have started to think about how to react to AIFM and are considering their options. There is a lot more to be done though and three years is not a great deal of time given the extent of change some will have to undergo.
Do you feel that some hedge funds are being complacent when it comes down to dealing with the AIFM?
Rowland: I don’t think asset managers generally and specifically hedge funds have been complacent. There has been a lot of comment and lobbying around parts of the directive deemed to be unsatisfactory. This has meant a much better result has been achieved than at one time seemed possible. Now is the time, however, for hedge funds to start thinking about how they need to prepare to be compliant and best placed in the market for when the directive does come into force.
Do you feel that the directive has almost reassured hedge fund managers given how stringent and intrusive earlier drafts of it were?
Rowland: Certainly – if you had taken some of the severest elements of the earlier drafts that were included from different interested parties across Europe, the directive would have been a great deal more restrictive and painful for the asset management industry than it will be now. However, just because we ended up in a better place, this shouldn’t distract the asset management industry from what they need to do to comply and structure their operations so they can work effectively going forward.
How will these changes impact hedge fund costs?
Rowland: Many hedge funds have told PwC in a recent survey that the AIFM will either result in fee increases or a slight decline in profits. There will need to be an exercise done by all hedge fund operators to determine how much costs will increase. If the managers’ burden of responsibility is higher, inevitably fees will either increase or profits will be hit.
How is the AIFM going to restrict hedge funds operations?
Rowland: There are new rules around a whole raft of different areas in how hedge funds operate. One of the main areas of debate is the marketing of non-EU funds or non-EU managers marketing to EU investors. National placement regimes will continue to operate for a while before transitioning over time to a passport base whereby non-EU managers and funds will need to be compliant with the directive to market in Europe and obtain a passport. This could come into place around 2018 – until then, we will continue with private placement. There are other issues funds must be aware of. There will be an increase in reporting requirements and the provision of information for investors and the authorities – more transparency around leverage and liquidity and restrictions around remuneration structures. Relationships with depositaries will change given the increased obligations and responsibilities of depositaries under the directive.
Do you feel some jurisdictions might not be able to cope with some of the requirements on third party jurisdictions?
Rowland: The requirements for third party jurisdictions are much lighter than some earlier drafts envisaged. There are requirements such as being a cooperative territory in relation to financial crime and terrorism and having suitable cooperation arrangements in place. However, jurisdictions including the likes of Jersey, Guernsey, the Isle of Man and the Cayman Islands, for example, should meet the requirements at this stage and their funds will be able to market into the EU under the national placement regimes.
Do you see hedge fund managers moving out of the EU because of this incoming regulation?
Rowland: Some players in the hedge fund community are looking at non-EU jurisdictions. The reported move of some funds to Switzerland is well documented. Many funds are, however, not intending to move but structuring themselves so that they are within the scope of the directive and they are looking for opportunities coming out of the regulation in terms of marketing – all of this change will inevitably create opportunities at the same time depending on how funds react to it. Hedge fund managers should be considering what will be best for their business in terms of competitive edge and markets. Whenever it is announced that a hedge fund is moving to Switzerland, it understandably grabs headlines; you won’t see many headlines about fund managers deciding to stay in London. The reporting of hedge funds moving en masse is therefore overstating the case.
Do you see increasing numbers of hedge funds moving onshore because of the AIFM?
Rowland: Many people haven’t looked at the regulation in sufficient detail yet. However, if you want to reach investors in multiple EU countries – moving onshore to obtain a passport might be an advantageous way to operate. The recent PwC survey suggested there would not be a great move onshore.
Do you think hedge funds have enough time to comply with the AIFM?
Rowland: There is enough time to comply. Fund managers who react appropriately will already be looking at their structures, their business operation and identifying what the directive is likely to require. Managers may need to set up new funds and arrangements to access certain markets and others will consider whether they are based in the right jurisdiction. We now have the skeleton structure of the regulation and the secondary level of the regulation is coming out over the next 12 months. Funds then have another 12 months until the directive is in force. Existing managers have a year after that to ensure they are compliant. In my view that gives managers enough time to reflect and work through their options and come up with the right answers. My concern would be that some managers may view three years as a long time and might not do much for 18 months. In this event, when push comes to shove, they might find themselves stretched or in a disadvantaged position to someone who has put the time and effort in into ensuring they have a product that meets both regulatory criteria and investor needs.
Amanda Rowland heads the PwC UK asset management regulatory practice in assurance. Her team advise asset managers on a variety of regulatory issues. Prior to joining PwC in 2006, Rowland was a partner at London law firm Berwin Leighton Paisner.