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Regulating the hedge fund industry

By Nicola Smith, CEO of Helvetic

In 2008 the collapse of the financial sector and the discovery of the Mad off scandal triggered in a worldwide sell-off of risk assets which brought financial markets to the brink of a meltdown. The blame was quickly leveled against participators in the financial markets which allegedly took advantage of low tax financial centres and light regulation allowing them to engage in highly speculative transactions through opaque structures. The financial industry and particularly the independent operators were placed under severe public scrutiny. Prior to 2008,it was suggested that financial irregularities had been kept to the confines of the boardroom, and in the case of hedge funds, the main focus was on their performance which afforded exclusivity and resentment against transparency which could lead to the divulsion of trade secrets and performance drivers. The landscape for hedge funds since the crisis in 2008,has changed dramatically. nicola

Investors have become more assertive and began demanding that more stringent checks and balances should be conducted on the operations of hedge funds.European Governments stressed the need to provide higher levels of transparency through enhanced regulation. Both of these factors have resulted in the move towards a hedge fund and private equity sector whose regulation has advanced to the high standards of the rest of the financial services industry. Key amongst these changes has been the implementation of the Alternative Investment Fund Managers (AIFM) directive.

The AIFM directive was published on 1 July 2011 and will take effect from 22 July 2013, with the aim of creating a comprehensive and effective regulatory framework for alternative investment fund managers within and outside of the European Union.All alternative investment fund managers are working towards ensuring compliance with the AIFM directive, however, concerns exist as to whether deadlines for implementation of the directive are likely to be met by fund managers and regulatory authorities.In January 2012, the UK FSA published a discussion paper which raised concerns that the AIFM directive could result in over-regulation of this industry and they highlighted the lack of implementation time that fund managers have to comply with the AIFM directive.

Since the economic crisis of 2008, institutions have closely scrutinized the management of investor monies by fund managers and demanded greater assurances that the reporting of funds is kept in order. This has led to an increase in the need for the active support and assistance by independent third party fund administrators.Fund managers may find the sudden increase in reporting and disclosure requirements difficult to manage whilst continuing to concentrate on managing underlying funds, which is where the role of the fund administrators can assist. One of the key functions of a fund administrator is to update their clients on reporting requirements and this represents an important step in bringing assurance and compliance activity to the required standard required under the AIFM directive.

Both investors and auditors recognise the level of support undertaken by independent third party administrators who are able to provide impartial reporting, greater transparency and risk migration, all of which are provided independently, services which in-house fund administrators may not be able to offer. The AIFM directive adds an obligation for fund managers to ensure valuations are conducted independently and in accordance with the laws of their home Member State and the European Securities Markets Authority (ESMA) have advised that valuations should generally be delegated to a third party to ensure the requirements under the AIFM directive are met.
2012 will be a challenge for fund managers, who will have to register or request authorisation from their home Member State, gather the information required under the AIFM directive and provide large volumes of reporting in order to ensure compliance with the AIFM directive, which will be a large drain on their resources. Investors will need to be assured that the required standards are being met by each fund manager and that all the necessary information is available for them to make informed decisions when investing into alternative investment funds. Statements of a more general nature in the offering documentation of funds without limitation or restrictions will no longer be accepted.
In order to maintain investor confidence, fund managers are encouraged to work alongside third party administrators to ensure all objectives of the AIFM directive are met by closely monitoring funds and providing adequate disclosures to investors. The expert counsel and oversight provided for by fund administrators will, in turn, allow the fund managers to focus on their core activities.

Notes to Editors
Helvetic Fund Administration Ltd (‘the Company’ or ‘Helvetic’) is a company with a clear vision of the future for fund administration. Helvetic has operated in Gibraltar since 1998 growing to become the largest operation of its type on the peninsular. It is regulated by the Gibraltar Financial Services Commission (FSC) and as the first fund administration company in Gibraltar, Helvetic was licensed by the FSC with the introduction of a licensing regime for the fund administration industry in Gibraltar.

The company has extensive experience in supporting sophisticated hedge fund structures and investment vehicles. Helvetic focuses on maintaining a close working relationship with its clients in order to provide them with services superior in quality, efficiency and responsiveness.

For more information, please see: http://www.helveticfund.com/

Press contacts
Nick Bird
Spreckley Partners Ltd,
Tel: +44 (0)207 388 9988
Email: [email protected]