Fund Managers 'Underestimating' EU Alternative Invesment Directive
Friday, February 05, 2010

Investment managers are failing to perceive the risks associated with the European Union’s Alternative Investment Fund Manager’s (AIFM) directive, according to a new report.

In a survey conducted by accountancy firm BDO, which asked investment managers in the UK to identify their top risks, only 3% of respondents cited the AIFM directive as a key risk for 2010 due to the implementation timescales.

"AIFIM is likely to be a major distraction for firms in the run up to its implementation in 2012," the firm said. "Analysts are concerned that the regulations are going to be so stringent on alternative investment fund managers—more so than in the US and Asia—that fund managers in those countries will be less willing to provide access to European institutional investors."

Neil Fung-On, head of funds at BDO added: “While the new directive is designed to assist EU passporting of alternative funds – including hedge funds, private equity and real estate funds - it could deter overseas managers from providing access to funds based in the Cayman Islands and Asia."

The European Commission's objective with the AIFM directive is to create a comprehensive and effective regulatory and supervisory framework for AIFMs at the European level. "The proposed Directive will provide robust and harmonized regulatory standards for all AIFM within scope and will enhance the transparency of the activities of AIFM and the funds they manage towards investors and public authorities," the Commission claims. "This will enable member states to improve the macro-prudential oversight of the sector and to take coordinated action as necessary to ensure the proper functioning of financial markets [and help] overcome gaps and inconsistencies in existing regulatory frameworks at national level and will provide a secure basis for the development of the internal market."

The Commission published its first first proposal for AIFM directive in April 2009 and the Council presidency published two revised texts in November and December last year. The text remains under discussion, but more than 1,000 proposed amendments to the directive have already been tabled in the European Parliament and there are doubts within the alterative investment community that such a broad 'one size fits all' approach to regulating the sector, encompassing such activities as hedge funds, private equity funds and property funds can work in practice.

Indeed, the Bank of England has already expressed reservations over the directive in its current form, and a recent paper by the Bank's Financial Markets Law Committee highlighted an number of issues in the proposed law which could lead to legal uncertainty and "widespread market disruption."