Hedge funds in Europe are set to suffer a sharp increase in fines and rejection by investors because of failure to understand changes in governance, reporting and operational requirements under the AIFMD.
That’s the view of ViClarity, a provider of compliance software.
US and European regulators have fined the banking sector a record USD43bn in 2013 and this pressure is set to continue as the authorities drive to minimise risk in this sector. Hedge funds are firmly in their sights, ViClarity believes.
ViClarity estimates that the vast majority of hedge funds and the broader alternatives industry in general have failed to appreciate that personal responsibility for compliance reporting is firmly on the fund managers themselves under the Directive. A failure to demonstrate a step up in monitoring levels will lead to punitive action by regulators and instil a lack of confidence in investors.
ViClarity has launched a compliance management software solution that enables alternative fund managers to meet their AIFMD obligations. It allows the firm to manage and demonstrate good governance and compliance with a comprehensive audit trail of accountability, highly visual reporting and ‘signature ready’ Annex IV reports.
“Many hedge fund managers seem to think the directive just requires a change in reporting practices but in fact a much more fundamental overhaul of business operations is required,” says Ogie Sheehy, founder and chief executive officer, ViClarity. “While many fund managers traditionally outsource most non-core activities, the responsibility to ensure and demonstrate compliance with continuous monitoring now lies very much with the managers themselves. From what we are seeing in the industry, we would estimate that just one in 20 hedge funds appreciate that managers are now responsible for this.
“It is not good enough for hedge fund managers just to say they are compliant; they must also demonstrate to their investors that they have the right processes and business structure in place.”
176 hedge funds in Europe have closed down during the last 12 months and in many cases these closures were not all due to poor performance but a failure to demonstrate unequivocally to investors that they the right regulatory controls were in place alongside a real, live governance process.
“We know a lot more funds will close because investors are not only questioning performance and charges but also the risk profile (both qualitative and quantitative) of a business,” says Sheehy. “Hedge funds do need to deliver performance but in order to attract institutional funds they must introduce more innovative technical solutions to deliver efficiency and demonstrate institutional grade processes; otherwise investors will be much happier with smaller returns from other, safer managers.”
The AIFMD came into effect on 22 July this year. In addition to some potentially significant changes to alternative investment funds’ operational processes, a central requirement of the Directive is that fund managers must submit an ‘Annex IV’ report that includes detailed information on investment strategies, valuations, risk exposures, portfolio concentration, total AUM and instruments used. The next deadline to begin submitting Annex IV reports for FCA authorisations rapidly approaching (31 December 2014), and the requirement to start capturing data, both quantitative and qualitative, is already in force.
ViClarity’s technology automates on-going compliance monitoring as well as Annex IV reporting, significantly reducing the burden on fund managers. To facilitate regulatory reporting ViClarity and partnering service providers will combine both qualitative and quantitative information, convert this into the regulators’ prescribed XML format and deliver it as a complete Annex IV report that is ready to sign.
ViClarity’s compliance toolkit becomes an inherent part of a company’s business process, keeping track of regulatory data points on an on-going basis. It manages the assessment, aggregation and reporting of controls for AIFMD and other regulatory requirements such as Dodd-Frank or FATCA in the US. This process replaces spreadsheets and the related issues around versioning, aggregation, audit trail and general process management, delivering real efficiency and visibility.
