By Sarah Boswell, Senior Counsel in the Financial Institutions team at law firm, Bond Dickinson
The investment industry continues to face a changing regulatory landscape. Sarah Boswell, Senior Counsel in the Financial Institutions team at law firm, Bond Dickinson looks into the implications of one particular piece of regulation, the Alternative Investment Fund Managers Directive (AIFMD).
Reverberations from the 2008 global financial crisis have been widespread and its impact continues to be felt, not only in economic, but also regulatory terms as firms prepare to assimilate further change and respond to a whole raft of new and refreshed legislative measures. Brought in by European regulators to tackle the perceived regulatory failings of the past, these initiatives (such as Solvency II, Mifid II, IMD II and CAARP), well intentioned as they are, pose very real challenges for the businesses tasked with implementing them.
The AIFMD, which came into force in July last year will have significant ramifications for those firms raising capital or operating, managing or involved with fund structures.
As far back as 2011 there was an estimated €2.2trn worth of alternative investment fund (AIF) sector assets under management in the EU. This figure demonstrates not only the reason why the European Commission (the Commission) and the European Securities and Markets Authority (ESMA) have considered it essential to regulate this ‘shadow banking’ activity, but also the heavy impact of the changes it requires. In the UK alone, ESMA has recently noted the estimate of more than 2000 AIFs which would be affected by this legislation and in other jurisdictions there are significantly greater numbers.
What are the implications of AIFMD?
So now AIFMD is here to stay (pending any changes on scheduled review in 2017) what does it require? AIFMD has very wide scope and applies to pretty much any kind of collective investment structure that is not a UCITS, notably including private equity, hedge funds, investment trusts, listed funds and property investment vehicles.
It is those managers shoes core functions lie in providing portfolio management and risk management services to AIFs that are primarily caught by the directives. There are also a number of non-core functions that are listed in AIFMD and may also be performed by AIFMs, including administration (for example legal and accounting services) and marketing. Some of these functions may be delegated by the AIFM, but AIFMD is strict about preventing too much delegation of core functions by the fund manager.
There are a number of exemptions under AIFMD, the key ones being: insurance contracts; securitisation SPVs; holding companies and joint ventures. There is also a group exemption for AIFMs which are limited to managing AIFs for parents/subsidiaries of the AIFM entity (as long as the parent or subsidiary itself is not an AIF). Additionally, a light touch is in place for alternative fund managers with assets under management below certain thresholds (although these AIFMs must still register with the local regulator).
As ever with EU legislation, the devil is in the detail and no reliance should be placed on any of these exemptions without consulting the specific and detailed requirements at each different Level (1-3) and in the local implementation.
One particular question over when a vehicle is considered a special purpose entity (to be out of scope) is one which has been particularly vexed.
Issues with AIFMD
The very nature of this directive is potentially problematic as it seeks to impose a single framework on an enormously divergent (in nature and scope) market. Practical difficulties will invariably be caused where the requirements of the AIFMD (for example in relation to remuneration provision) are similar but not entirely akin to requirements of other European or member state domestic legislation. Change is particularly likely to follow in terms of custody and primer brokerage arrangements.
Protection for investors is a noble aim, but many have challenged the need for a ‘regulation revolution’ for the AIF sector. The cost of compliance with this new legal burden will inevitably mount up and it remains to be seen whether there will be a latent effect on the viability of certain areas of this sector. It is also possible that investors will be put off by the potential increase in cost and therefore decreases in the accessibility of these areas. It will be a real cause for concern if the involvement of entities such as private equities funds and venture capital funds in economic recovery by, for example, boosting the development and resurgence of SMEs through investment is curtailed as a result of their efforts being diverted towards the burden of compliance.
Only time will tell whether, in the drive to avoid a repeat of the 2008 crisis, a full recovery of the financial sector is vitiated by this regulation revolution.
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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