Hedge funds in Europe that are rushing to outsource their compliance to meet looming reporting deadlines under the AIFMD are largely failing to consider the risks of doing so, according to ViClarity.
ViClarity estimates around seven in 10 hedge fund firms in Europe are outsourcing their reporting. But it believes many of these have failed to realise that the AIFMD requires fundamental changes to business structure, conduct and processes – and are implementing quick fixes that will unravel in the medium term.
Ogie Sheehy, Founder and Chief Executive Officer, ViClarity, says: “AIFMD is not just about changing the activities of a firm’s chief risk officer, it is about changing the way that most people in the firm conduct business. This lack of understanding of how much needs changing is adding unnecessary risks.
“With the AIFMD having come into force in the summer, regulators are expected to start cracking down on hedge funds in 2015. While service providers can manage some aspects of this on the AIFM’s behalf, accountability for the business conduct and operational procedures of the business is firmly on the managers themselves and reporting structures need to be in place to evidence this. Hedge fund managers will shortly face a regulatory brick wall if they don’t start now to address the business conduct challenges of AIFMD.
“Some EU member-states already have laws in place that clearly place responsibility for the business conduct of a financial institution directly with the senior executives of the firm on a personal basis. This makes them personally liable for the conduct of the firm, including to the extent of criminal liability.
“Many factors such as the size or culture of a hedge fund firm or its in-house analytical ability influence its propensity to outsource. But those that are outsourcing in practice appear to have one thing in common, which is a tendency to pay minimal attention to the audit of business conduct.”
Although AIFMD requires additional data reporting to regulators, this is only a small part of the changes that hedge fund managers need to make to achieve compliance. Those managers that do not make the necessary changes within a matter of months are putting their business and their clients at risk.
