Daniel Maycock, Director, Investment Management Services with Lawson Conner, notes that the level of independence and governance oversight also offers a clear benefit to investors.
“Compliance and risk management, independent of the fund manager, are key for investor protection. Investor protection can be greatly enhanced by funds operating on an AIFMD platform, which provides risk and compliance oversight over the fund managers’ daily trading activities and which is in no way commercially incentivised by the fund performance. This removes or greatly reduces a lot of the risks when investors are looking to identify new managers,” comments Maycock.
From a distribution perspective, therefore, platforms can act as the gatekeeper to good governance, which can only strengthen the arm of managers as they bring new products to market. Independent oversight is something that investors welcome, and this makes asset raising a potentially easier task.
“Platforms are good for smaller managers with low AuM who are looking to build a track record and grow their business, and at some stage go independent. The issue with platforms is that you’ve got contamination risk and you have no choice over which service providers are used. You have to accept the fund directors, lawyers and so on for the sub-fund. So it does diminish the control aspect,” comments Peter Northcott of KB Associates.
If a manager chooses to launch a sub-fund, typically this will come with co-branding to reflect the name of the host platform. The other option is to request the platform to build a standalone fund, which many are happy to do. This frees up the manager to choose their own service providers and the fund would launch under their name.
For large managers who decide to take on the responsibility of the AIFM in-house, there are still options to work with regulatory reporting and compliance specialists. Indeed, the Annex IV reporting burden can be substantial depending on the number of markets a fund is distributed into under national private placement rules.
In terms of distribution opportunities in Europe, AIFMD hasn’t had a significant impact yet because the passport is only available to EU-based AIFMs running EU-based AIFs. There aren’t that many that fall into that category at the moment. The vast majority of hedge fund managers are still managing offshore AIFs.
“The key issue that everyone is waiting to hear about is the extension of the passport to non-EU AIFMs and AIFs, which is currently being considered by ESMA with a recommendation due later this year. That will dramatically change the landscape. Meanwhile, EU AIFMs running an EU AIF should currently be enjoying strong asset raising conditions, but that is not yet obvious – although it is still early days,” concludes Northcott.
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