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Money managers under the microscope

Paul Compton: How bitter a pill is the draft EU directive?

November 17, 2009

Guest blogger Paul Compton is head of product management at SunGard Alternative Investments.

The views expressed here are the author’s own and do not constitute Reuters point of view.

A recent EU report on the draft AIFM (alternative investments fund managers) directive commissioned by the Parliament’s Committee on Economic and Monetary Affairs has added to the furious debate generated by politicians and by the army of campaign groups mustered against it.

comptonThe report criticised the directive as “poorly constructed, ill-focused and premature,” and something that is likely to impose untenable costs on the alternative investments industry. The draft directive has raised a lot of hackles, but just how bitter a pill will it be to swallow in reality?

It’s clear that there’s a long way to go before the issue is settled and legislation is brought in, but it’s also clear that there’s no getting away from greater regulation of some type or another. Some aspects of the draft directive have been particularly controversial, especially the requirement to use a European credit institution as custodian.

One thing that seems sure, however, is that an increased duty of disclosure and regular reporting to investors and regulators will be a firm feature of the new regulatory landscape. A well managed fund will already have strong record-keeping and reporting processes, both internally for its own management and perhaps externally — institutional investors in particular generally insist on higher standards of transparency than would have been typical of the industry ten years ago.

No one likes to have extra requirements imposed, but you can’t help feeling that the draft directive’s disclosure requirements are unlikely to impose too onerous an additional burden given the regular reports that a well managed fund will be generating already for its management and stakeholders.

Well in advance of politicians reaching any meaningful conclusions about the future landscape, hedge fund and private equity managers have been put under greatly-increased pressure to disclose information related to valuations, risk and operational processes as more institutional investors have got into alternative investments. Madoff and other scandals in 2008 really focused investor attention on this issue, however, driving increased scrutiny on back office and risk systems in particular.

With money starting to flow back into hedge funds again, the industry is now more confident and willing to look at the systems it needs in order to respond to the more intense requirements of investors and eventually the yet-to-be-determined disclosure requirements of the EU and US regimes.

At the same time, fund managers have to control costs and in some cases adjust to significantly lower assets under management compared to their pre-crisis peak. Technology will inevitably be at the core of how hedge funds respond to this new world, so the challenge is on technology vendors to be ready with more flexible reporting capabilities, stronger investor accounting functionality, and hosted services that give funds the option of outsourcing core systems.

To hear more of Paul’s views on the alternative investments industry, click here.

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