Alternative Investment Fund Manager’s Directive Q&A

By Andrew Rubio, CEO at Throgmorton UK Ltd

What were the initial intentions of the AIFMd?
After the events of 2008, the EU felt that more regulations and controls were needed to be placed around the alternative investment fund sector within the EU.  Given that the UCITS funds had been defined and regulated for several years, the AIFMd was aimed at regulating any alternative fund product that wasn’t a UCITS product.  The intention was to provide investors with protection of such funds failing and to limit the potential from any systemic risk that might be posed by such products.

Why has this piece of legislation been much derided?
The fact that if a product isn’t a UCITS product has meant that the legislation attempts to deal with a “one size fits all” mentality.  As such, hedge fund managers, private equity managers and real estate fund managers are all being treated the same way.  Given the fundamental differences, significant inconsistencies abound throughout the directive.  Furthermore, the initial drafting was completed with little or no consultation with the industry with the resultant document being badly drafted, inconsistent, and in parts, wholly inoperable.

Have politicians become too involved in its evolution?
Absolutely, this has clearly been a largely political exercise intended to appeal to the left of centre supporters in Europe.  Following the credit crunch, the politicians wanted to teach hedge fund managers a very public lesson.  Perversely, it has been shown, time and time again, that the alternative sector did not cause the problems that the directive sought to police. Irrespective of this, the EU has continued unabated with its hedge fund bashing.  Furthermore, given that the alternative investment industry in Europe is largely in the UK, it was also an opportunity for the continental politicians to have a swipe at the Brits.  A bit like the voting for the UK in the Eurovision Song Contest, but with more vigour!

Once implemented what will be the main affects be on your clients?
As the final drafting has not been completed, it is hard to say what the final impact will be for our clients.  Having said that, the main areas of concern are the depository rules, the third country provisions and remuneration.  Given that a significant number of hedge funds are domiciled offshore in jurisdictions such as The Cayman Islands, the issue of whether such funds can be marketed in the EU is a cause for concern.  To an extent, the AIFMd is attempting to create “fortress Europe”, with such protectionism angering non EU fund managers. In the meantime, and potentially until as late as 2018, hedge funds managers will still be able to market their funds in the EU through the private placement regimes.  And as for remuneration constraints, anything that is seen as a restriction on entrepreneurial pay rates is anathema to those involved.

How will it affect your business?
Again, we do not know.  For the time being, it is a waiting game but we are closely monitoring the situation.  Potentially, there might be some changes to fund management entity structures which could provide additional work for us.

Do you foresee more regulation for the fund management industry being implemented in the next few years?  
With Dodd Frank in the US and Basel III and the AIFMd in Europe, there is more than enough on everyone’s plate for now.  And I don’t just mean the industry.  The regulators and politicians have an awful lot to deal with at the moment.  I can’t see there being too much more for the short to medium terms, as the aforementioned changes are yet to come into effect.  And once they do, everyone will have to see how it is working, iron out bugs and deal with the vast mountains of information that will have been reported.  And the sixty four million dollar question:  what to do with that information!