Hedge fund lobbyists can pat themselves on the pack for a job done well, as the latest draft of the AIFM Directive has omitted restrictions on leverage and capital requirements.
However some have still complained that cost of doing business will increase. Fund managers will have to employ separate custodians and third party valuations. Think tank Open Europe has estimated that hedge fund costs will increase by 30%.
It is still too early to define how much the AIFM Directive will cost. According to Ian Headon, senior product manager for alternative asset servicing, Northern Trust: There are aspects of the current Directive draft that are less onerous than earlier drafts – however, there remain provisions in the Directive which will cause extra overhead for fund managers, especially in the area of reporting, transparency, disclosures and, potentially, depositary services. The way in which the Directive actually gets implemented at national levels will define how much extra cost is experienced by managers and, ultimately, investors, and whether the administrative overhead can be outsourced to third parties.
Although the Directive will not come into force until 2013, the asset management industry has been busy developing its portfolio pricing capabilities.
Societe Generale Securities Services has won 10 mandates for over-the-counter and structured financial instruments pricing since January 2010.
According to Philippe Rozental, head of asset servicing at Societe Generale Securities Services: Even in the case where the hedge fund employs third party custodians, very few today have the capacity to valuate complex OTC derivatives with the required level of transparency and quality. In order to provide the valuation in a proper way, you need a strong IT infrastructure, with well educated financial engineers and on top of this there are two key elements: knowledge of market practices and robust market data repository.
The potential increase in fees for custodians and fund administrators due to regulatory pressures on hedge funds will be a welcome break for some in the securities services industry, as the AIFM Directive has failed to relax its stance regarding asset liability. In a note on the Directive, Edward Black and Martin Cornish, partners at financial services law firm Katten Muchin Rosenman, explain the problem: The Proposal retains other provisions that have raised concerns within the alternative investment fund industry, in particular with respect to depositaries and their liability. Under the Proposal, funds (whether EU or non-EU) which are managed by EU managers must have depositaries – and among other requirements, the depositary must be liable to the fund, or the investors, for the loss of any financial instruments which it holds for the fund. The liability remains, even where a depositary has delegated responsibility for custody to a third party – the depositary will be able to contract out of this liability, but only if the contract meets certain specific requirements.
Although many areas of the AIFM Directive have been finalised, the launch of the European Securities and Markets Authority in January 2011 may see more changes to the Directive. According to a report from Data Explorers: [ESMA] is the EUs eyes and eyes for all regulations being observed across securities markets, ratings, clearing and asset management. National regulators will continue to be in charge of day to day matters but ESMA has the final say if there is a cross border issue within the EU as the final authority.