The so-called alternative investment fund industry, or AIF, is a broad church, encompassing such diverse activities as private equity investment, commercial property funds, and hedge funds.
A few moments of thought should be enough to make clear the huge differences between these disparate investment activities. Buying a stake in a company or helping to fund an acquisition requires rather different skills and experience to those required to deal successfully in commercial property. About the only thing that is the same is the fact that money changes hands in both operations and in each case the aim is to generate a profit. Designing an (often esoteric) investment strategy for a fund which will then be run on behalf of a cohort of investors is a different beast again.
To advance on all three with a one-size-fits-all piece of legislation was never going to look particularly smart. Yet this is exactly what the European Commission did with its Proposal for a Directive on Alternative Investment Fund Managers—a directive pushed through the drafting stage with blinding speed at the behest of Denmark’s pugnacious socialist Poul Nyrup Rasmussen.
Since the publication of the Directive proposal, to give the Commission its due, it has been rowing backwards fairly speedily and it may well be that the final form of any Directive on this topic which finally appears will be very much more acceptable.
The lead organization in the fight against the original thrust of the draft Directive is AIMA, the Alternative Investment Management Association. It makes clear in its position paper on the Directive that it is not against regulation of the AIF sector. After all, investor confidence is everything to the sector and, after high profile scandals like the Madoff affair, an effective regulatory environment based on appropriate and proportionate requirements demanded of the sector would be exactly what is needed to restore investor confidence.
As part of this, AIMA is in favor of the registration and authorization of hedge fund managers globally, which goes further than the current Directive. It is also in favor of enhanced transparency. Again, after Madoff, ensuring that investors have enough information to understand (a) what the fund’s strategy entails, (b) how it is generating those results, and (c) where their money is going, is in everyone’s interests.
AIMA also likes the idea of a pan-European passport for approved funds, so that a fund authorized in one member state can trawl for business in all member states. The problem is that, in its current form, AIMA, and just about everyone else associated with the AIF sector, reckons that the Directive cannot but damage the EU’s €250 billion hedge fund market (to say nothing of its PE and commercial real estate markets).
For a start, the major thrust of the Directive is based on the idea that the sector poses a “systemic risk” to global financial markets. This, as AIMA politely points out, is rubbish. “All significant analysis, including the de Larosière Report to the Commission and the Turner Review has concluded that the hedge fund industry neither caused the crisis nor played a significant role in it,” it points out. Hammering the sector, which the Directive does in a variety of ways, is not, therefore, to the point.
In other words, this directive has been misconceived and is now in need of a radical rethink. It seems that the Commission might now be more amenable to that message, but this is a saga that still has some way to run. Watch this space…
- US Financial Regulation: A Hopeless Tangle, or Complexity for a Purpose? by Lawrence J. White
- When Form Follows Function: How Core–Satellite Investing Has Sparked an Era of Convergence, by Christopher Holt
- Booms, Busts, and How to Navigate Troubled Waters, by Joachim Klement
Tags: alternative investment , derivatives , financial crisis , fund management , regulation