By Ahila Karan, 16 December 2012, www.prohedge.co.uk
Unhappy hedge fund managers discussed the AIFM Directive Level 2 at an infoline AIFMD event last week. The blind sighted view of regulators and the implications for service providers, especially depositories, stirred debate on the need to “lobby to put this back”.
Regulators have “no real clue as to what they are talking about, which is detrimental in this economic time”. Christian Szylar, Marshall Wace Global Head of Risk & Compliance, compared recent regulation to brakes on a car, “regulators work too much on the brakes that the car stops”. Costly implementation is a barrier to entry, and regulators compromise competition in the industry. Questioning the FSA’s intentions, Szylar said, “I’m not against regulation, but I think it’s a political directive, that’s it.”
Whilst criticising the premise of AIFMD, managers also attacked the lack of structure and clear guidance. “The big problem”, Sue Woodman, Equistone Partners Europe General Counsel said, “6 months away from implementation and management asks, what will we do?” Still awaiting the Treasury’s report and further FSA guidance, hedge funds lack a clear picture of future regulatory compliance. With implementation in July, time is too short to administer the changes in operations. “It’s going to cost us lots of money and time to market”.
Uncertainty extends to service providers. James Burdett, Partner at Baker & McKenzie, has grappled with the new directive, “I can’t with any confidence advice clients what to do. We are feeling our way, but no one wants to jump yet.”
Ahead of implementation, Due Diligence is necessary between hedge funds and depositaries; “it’s about two-way due diligence, because you’re putting the banks reputation on the line”, explained Sheenagh Gordon-Hart, Executive Director Worldwide Securities Services, JP Morgan. Experts believe this process will take from 3 to 6 months. Woodman exclaims, “we should lobby to get [AIFMD implementation] put back, otherwise we’ll be managing chaos.”
Whilst Gordon-Hart recommends channelling lobbying towards national authorities, and some even expressed “the EU Commission deserves a bloody good kicking”, the industry remains mindful of criticising the EU Commission, who is “reluctant to be seen as doing something that the industry demands”. Burdett remains hopeful, however, “we’re almost certain implementation will be pushed back”.
In addition to Due Diligence burdens, depositaries are now liable for losses on deposited funds under the directive. Depositaries are also required to hold insurance policies, and add to policies for each additional fund held. Woodman explained, the FSA are yet to clarify guidelines, so insurance companies “don’t know what they’re insuring”, making it harder for depositaries to obtain insurance contracts. Since only 6 main depositary banks exist, the industry is now concerned over the future of depositaries. The stalemate position and large legal burdens, have discouraged depositaries from operations.
The FSA has also failed to re-incentivise hedge fund managers. The AIFMD bonus structure splits between cash and deferred payments (a 60:40 split); the latter could be shares or a synthetic fund structure. However, pegging bonuses against the performance of funds is not the way to go, Woodman believed; “if the fund doesn’t do well, the deferred element is not received. And instead, it would go back to managers of the fund, so it doesn’t work.” Remuneration as yet another area of poorly considered regulation, and the industry waits on for the finalised guidelines.
Disgruntled, hedge funds felt “very much on the backfoot” for three years, and are now navigating around the wide cracks on route to July’s AIFMD implementation. “All we want,” insists Gordon-Hart, “is to be able to manage the process sensibly.”
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