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Money managers under the microscope
Paul Compton: How bitter a pill is the draft EU directive?
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.
The 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.
AIMA claims “broad consensus” on EU hedge fund directive
For UK-based opponents of the controversial EU hedge fund directive, there are signs the draft could be overhauled.
Hedge fund industry body AIMA said today “there is now a broad consensus among European policymakers that the directive does need a lot of work and that there will be significant revisions”.
The group has been campaigning vigorously against the draft law, which proposes controls on leverage, which service providers can be used and where funds can be sold, and says it should instead focus on three areas — registration and authorisation, reporting of systemically-relevant data and a workable passport.
Given UK-based hedge fund managers are already regulated by the FSA and AIMA has already put forward proposals on reporting hedge fund positions to regulators, this would be a much-watered down version of the directive.
Meanwhile, Ken Clarke, shadow business secretary for the UK opposition Conservative party, told The Times he didn’t think hedge fund managers were genuinely concerned about the proposed new rules as they would be diluted through ordinary negotiations, although AIMA said “to declare an early victory is very premature”.
Nevertheless, there is a marked change of tone in the UK. The next step will be to see if that change is reflected when supporters of the Directive such as Poul Nyrup Rasmussen next lay out their position.
(See also NAPF takes aim at EU AIFM draft and Onshoring the hedge fund industry)
Turn! Turn! Turn!
For all the political noise about hedge fund regulation, today’s Turner review looks like a relatively easy set of rules for the industry to stomach.
In his 126-page document, mostly about the banking sector, FSA chairman Adair Turner says the watchdog will demand more information from hedge funds and says regulators should be able make rules in areas such as capital and liquidity if hedge funds start to pose systemic risks or become “bank-like” in their activities.
And while Turner points out hedge funds can pose systemic risks, he notes the FSA’s already-extensive regulation of hedge fund managers.
Significantly, he clearly draws a distinction between the activities of hedge funds and banks, pointing out that hedge funds have tended to be much less leveraged.
Hedge fund industry executives believe they can live with disclosing more information to regulators, which mirrors proposals put forward last month by AIMA, a hedge fund industry body. AIMA, the PWG and the MFA have also written to the Financial Stability Forum, committing to work together towards global standards.
Some leveraged credit strategies could see returns hit under the proposals, which could make them sit on extra cash, but this is relatively small proportion of the industry.
Next month will be key for hedge funds, as G20 leaders meet in London on April 2 and the European Union proposes binding rules on April 21. If the industry can escape with new disclosure obligations or with caps on prime broker borrowing — a suggestion made by many in the industry — then AIMA will be able to claim a major success in seizing the initiative in the hedge fund debate.
