In the wake of the financial crisis and economic downturn that have shaken the alternative investment industry over the past few years, fund managers and service providers face new challenges in restoring impetus to the sector – not least in Europe, where a new regulatory environment will be ushered in by the European Union’s Directive on Alternative Investment Fund Managers, says Nina Kleinbongartz, product manager for alternative investments in Europe with Citi Global Transaction Services.
The legislation, drawn up in response to the crisis with the aim of minimising systemic risk, increasing investor protection and enhancing the EU single market, has taken 18 months to finalise and is scheduled to take effect in 2013, introducing for the first time harmonised regulation of European-based fund managers and of the funds they manage.
A central feature of the legislation is the introduction of a passport that will allow authorised alternative managers to market their funds to sophisticated investors throughout the 27 EU member states. Following formal approval by the European Parliament, the legislation could be implemented by member states as early as next year or 2012. Following the example of its rapid adoption of successive Ucits directives, Luxembourg is likely to be among the first countries to transpose the directive into national legislation in the course of next year.
The grand duchy already has experience in providing a regulated environment for hedge and other alternative funds, having offered Undertakings for Collective Investment Part II structures for more than a decade and successfully introduced the Specialised Investment Fund (SIF) regime in February 2007 – at the end of September there were 1,144 SIFs with EUR195bn in net assets. And over the past two years many managers have chosen Luxembourg to domicile Ucits funds that use derivatives to replicate hedge fund strategies.
Once in force, the AIFM Directive will entail changes to the SIF regime, which currently does not impose minimum capital levels. The directive sets out minimum capital requirements for alternative fund promoters as well as stipulating high levels of transparency for the fund manager in areas including remuneration and investment strategy.
In addition, the directive places greater responsibility on the depositary bank, which is bound to return the financial instruments in its custody without undue delay and may be liable for any losses resulting from failure to perform its duties satisfactorily. This increased risk may lead the depositary bank not only to charge higher fees but conceivably to exit more risky markets, consequently restricting fund managers from investing in markets or products that are not covered by their custody network.
To avoid finding themselves limited to conservative investment strategies, managers may prefer depositaries with broad international proprietary networks and respected brand names that will reassure their investors. In addition, service providers will be called on to facilitate the new levels of transparency and flexibility of reporting that investors are demanding.
The global operating model adopted by Citi over the past couple of years is proving a key advantage in an environment where transparency is not just a core investor demand but increasingly a marketing tool for managers. What is now essential is not just the detail of insights into the fund’s operations but the speed and flexibility with which investors can access the information they require. The global operating model also boosts the ability of fund managers to embrace new markets and retail distribution models, but the ultimate beneficiary is the investor.
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