Peter Moore (pictured), Head of Regulation at the IMS Group, on AIFMD and its failure to make distinctions in the European alternative asset management industry…
In 1991 the UK’s Parliament passed The Dangerous Dogs Act (DDA) in response to a sudden increase in the number of serious dog attacks reported by the UK media. Nowadays, it is often cited as the prime example of a rushed piece of legislation introduced as an overreaction to transient public mood.
Such a phenomenon will be familiar to participants in capital markets, many of whom will have detected how politician-induced overregulation of markets and their participants follows a period of “enlightened” deregulation, as inevitably as bust follows boom. Rather like how some aspects of AIFMD, most notably those relating to depositaries, are an overreaction to Madoff.
Conversely, a significant distinction between AIFMD and DDA is that the latter is targeted at specific dog types regarded in need of greater control to protect the public and in respect of which special measures (court approval, insurance, breeding restrictions, obligatory muzzle and lead) apply. So despite its flaws, the DDA draftsmen did attempt to target its measures towards the specific problem which had manifested.
AIFMD, on the other hand, is a piece of scattergun regulation impacting all those involved in the European alternative asset management industry. In defining the alternatives industry as everything non-UCITS, AIFMD is about as precise in its policy objectives as defining the perimeter of the canine world as everything with “four legs and a tail that’s not a cat”. Whether a dog is controlled by the DDA will depend on a court judgment about its physical characteristics and whether they match the description of the four controlled types. So while the much maligned DDA is able to look past labels in pursuits of its objectives and target its provisions towards characteristics that have actually caused harm, too many financial services regulatory provisions impose burden and costs on a much broader universe than is absolutely necessary.
On the matter of breed labels, this serves to demonstrate how unhelpful, misleading and potentially hurtful it is that the entire alternative investment trading universe, including both the investment managers and all their variety of funds, have wound-up known as “hedge funds”. The danger of using this colloquial label to refer to such an inhomogeneous service industry founds the potential for incongruous association with headlines like “FSA fines Hedge Fund Manager” as occurred last month in relation to Alberto Micalizzi, CEO of investment manager Dynamic Decisions Capital Management. FSA enforcement cases like Dynamic Decisions, and that last year relating to officers at Mercurius Capital Management, are certainly potentially damaging to the hedge fund industry, not least because at the time that AIFMD was first introduced it was often mentioned that while the US had had Madoff (so fraudulent in its structure that it didn’t even get close to being a hedge fund), Europe had not yet witnessed any major problems with any specific hedge funds or managers.
However, while such cases are unhelpful, they need not necessarily damn the entire hedge fund species. Let’s follow the DDA example and look beyond species or breed but instead to higher-risk characteristics. Of much more material significance than being hedge fund managers was the fact that at Dynamic Decisions and Mercurius, the crucial segregation of investment activities broke down catastrophically, abetted by the apparent abuse of the firms’ size and ownership arrangements.
So while there are lessons for regulatory policy makers in the DDA, maybe the most telling lesson of cases like these is that, analogous to dogs, there is no such thing as inherently dangerous hedge funds or managers, just the occasional bad owner.