23 July 2013

FN: AIFMD - How far has it come?

Financial News looks at the main controversial areas of the Directive and considers how far the legislation has come from the strict prohibition that was initially feared:

1. Accessing EU investors

In its initial form, non-European Union fund managers would have been unable to access EU-based investors, prompting cries of protectionism and fears that pension funds would bear the cost. Under the final version, the private placement regime - whereby "sophisticated investors" can invest in alternatives funds - will stay in place until 2018, and non-EU fund managers will be able to market funds into Europe if they obtain a passport.

2. Leverage

The European Securities and Markets Authority argued that it is impossible to use a single figure to designate the use of leverage on a substantial basis and advocated using an advanced approach to calculating leverage. In the final draft, managers are able to set self-imposed leverage limits.

3. Custodians

Under the final version of AIFMD, hedge fund managers marketing offshore funds to European investors need to appoint at least one depository to carry out duties including oversight over fund valuation, subscriptions and redemptions, and compliance.

The European Commission has also softened its stance on custodian liability: under the initial draft custodians had to accept unlimited liability for all of a fund’s assets, while now they only have to be liable for the assets that they control of that particular fund.

4. Delegation

Under the final version, “managers have to retain either the portfolio management or risk management function but as long as the majority of their activity is within a jurisdiction they can delegate either of these functions without being considered a letter-box entity”, according to James Lasry, a partner and head of funds at Hassans law firm in Gibraltar.

5. Remuneration

This is a key area where there is still substantial uncertainty. Firms may have to defer more remuneration for longer periods and may have to pay more staff remuneration in fund units, to better align financial incentives for the fund managers and other staff with investors’ interest. This could potentially mean that managers need to substantially overhaul their management structures and processes. 

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