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Inside Track: UK and US hedge funds on ‘level regulatory playing field’…for now

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The hedge fund regulatory landscape is in flux right now. Keeping abreast of the most pertinent issues in the US and Europe can be difficult. Hedgeweek spoke to Andrew Shrimpton, a partner at Kinetic Partners – a leading London-based asset management advisory firm – to get the inside track on current developments.

For 18 months or so the FSA have been conducting six-monthly Hedge Fund Surveys to gauge the activities of hedge fund managers, something that the SEC have been opposed to. Until now, that is. “It’s called a Form PF and they’re just testing it out, it hasn’t been launched yet,” confirms Shrimpton. “Funds with more than USD1billion will be required to report quarterly so it’s different to the FSA survey which is six-monthly for everyone over a certain threshold.”

Prior to 2008 the US had a light touch regulatory regime. But with Dodd-Frank requiring the mandatory registration of managers with USD125million plus in AUM, and the potential introduction of Form PF, market regulations in the US and Europe are clearly becoming more aligned. “With Dodd Frank it’s more of a level playing field than ever with mandatory registration of US and UK fund managers and data being collected on them,” says Shrimpton. “After the introduction of AIFMD in mid-2013 Europe will again be heavier and the US, by comparison, slightly more lighter touch.”

In Europe, the next big development concerns the Capital Requirements Directive. By July, fund managers will be required to implement policies and procedures (which are lighter touch than those being proposed in the AIFMD) to conform with the principals of the AIFMD’s remuneration code.

This in itself is not a major concern. But by year-end fund managers will also be required to make a “public disclosure of aggregate remuneration” as part of the Capital Requirements Directive. Understandably, this is a contentious and sensitive issue, particularly for boutique hedge funds that employ a handful of staff. “It’s a big concern I think. For small hedge funds it’ll be obvious how much certain employees are earning,” says Shrimpton. “The less people you have the less it becomes an aggregate disclosure and becomes more of an individual disclosure.”

He believes it’s a fair argument and one that the FSA will consider: after all you can hardly compare the aggregate disclosure of an investment bank employing thousands of people with a start-up hedge fund. “The FSA are considering whether something can be done to soften this and AIMA have raised the issue as well,” confirms Shrimpton.

Just to add to the growing regulatory burden being put on fund managers’ shoulders, the guidelines on a bribery act have also recently been released following a delay: meaning yet more policies and procedures to implement. Unsurprisingly, general sentiment in the fund community is apathetic. “They feel the regulatory authorities already manage such issues,” says Shrimpton.

April 15 saw the release of a discussion paper by ESMA to get feedback from “stakeholders”. Central themes in this paper revolved around the use of leverage, how to define it, and how best to calculate it, with one question asking: Do you agree that gross asset value, when available, is an appropriate measure of the leverage generated by the AIF? How one defines AUM is also explored in the paper. Respondents have until May 16 to reply.

In Shrimpton’s view, the smoking gun with AIFMD remains the depositary liability issue, which isn’t addressed in this latest paper. He says that there have always been two pillar issues with AIFMD: the third country issue, “which has sort of been resolved with the future introduction of passporting”, and depositary liability.

“It remains an issue,” said Shrimpton, confirming that this particular working group, under ESMA, is being led by the French. “They want the depositary to make good if “assets” are lost.” The problem here is how do you define “lost”? It’s a complex issue that needs clarification. The devil will no doubt be in the detail, but precisely when this detail gets agreed upon is presently unclear. Certainly, post-Madoff, the French have been the most outspoken on this issue. “If the liable to requirement becomes too onerous depositors are going to put prices up or move out of the market,” opines Shrimpton.

And so the regulatory juggernaut rolls on.

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