According to a think-tank commissioned by the European Parliament, regulation to the hedge fund and private equity industries may decrease European GDP by 0.2%
Europe Economics, in a report on the impact of the Alternative Investment Fund Managers Directive, said The annual growth rate of EU GDP would fall by around 0.1-0.2 per cent, and booms and busts would be around 0.8 per cent of GDP less. There would be a short-term rise in unemployment of 0.8 per cent of current employment as the AIFM sector adjusted, whilst in the longer term peak unemployment would be around 1.3 per cent less as a consequence of busts being smaller.
One-off compliance costs to deal with the new directive could range between 110 million and 2.2 billion for alternative investment vehicles. Transaction costs could also rise up to 30-45 basis points if the alternatives industry attempts to circumnavigate the Directive with regulatory get-arounds.
Retail investors may also see increasing access to alternatives investment funds as managers seek to repackage their products into UCITS funds.
The highly politicised problem concerning hedge fund managers and capital flows leaving the EU was deemed to be minimal. According to the report: It is likely that some fund managers would exit the EU market as result of limitations on the use of leverage, constraints on the use of certain strategies and the additional cost of complying with the Directive. Arguably those with a strong domestic base are less likely to exit, which are also the types of funds that may be more likely to locate the funds onshore. Similarly, it is likely, in the short term at least, that EU investors would be more inclined to move capital from off-shore funds to on-shore funds to reduce perceived risk.
And analogously EU fund managers may bring their funds increasingly on-shore where domestic investors are clearer on the regulatory regime in place. There is also the potential for non-EU domiciled investors to withdraw their funds in the short term, and, in the longer-term, EU investors to move their capital to compliant non-EU domiciled fund managers. However, although it is plausible that there would be some capital outflow, we believe that the amounts involved (at least in the short term) will be modest.
Regarding the impact of AIFs domiciled outside of the EU, the report suggests that of the 80 per cent of hedge funds domiciled outside the EU, between 5 and 25 per cent would still be allowed to market their funds to EU investors
The report remains Euro-centric on the problem of off-shore valuation. If the AIFs use valuators domiciled in third countries rather than the EU the quality of services supplied by these valuators (either as a result of lower supervisory standards in third countries or a lack of local information); and the ability of on-shore market participants and supervisory bodies etc. to effectively monitor their activities may be potential risks.
In a move that will be pleasing for custodians, the report puts forward the notion that an alternative changes in the draft Directive could be to Reduce the liability standard for depositaries in line with the UCITS Directive.
The report explains that as depository liabilities will increase, they will be forced to increase the amount of capital they hold, and the cost of capital will increase, while the likely reigning in of sub-custodian networks will mean that investors are likely to lose out on returns in more risky or emerging markets.
The full report can be found here