The alternative investment fund manager’s directive (AIFMD) comes into force today following a year-long transitional period. It comes as part of the European Union’s attempt to promote transparency and mitigate systemic risk.
It establishes an EU-wide framework for the operation of all alternative investment funds within the EU, and non-EU funds sold into the EU. Notably, it sets out rules for the non-UCITS fund sector, in particular hedge funds, private equity, real estate, infrastructure and investment trusts. An alternative fund is one that is not one of the three traditional asset classes, ie: not stocks, bonds or cash.
The directive will largely applies to the marketing or management of alternative investment funds in Europe and includes detailed reporting requirements.These reporting requirements require alternative investment fund managers to supply their relevant authorities (in the UK this would be the FCA) with certain information on an ongoing basis, including, for example; the main instruments in which it’s trading, the markets where it actively trades or is a member, and the principal exposures and concentrations in the portfolios of the alternative investment funds it manages.
We offer up 8 things you should know about AIFMD:
1.) Non-European Alternative Investment funds used by European investors will be affected.
According to Grant Lee, asset management director at PwC, “this will trigger reporting in each member state where the fund is marketed. The fine line between marketing and having ongoing dialogue with investors remains somewhat blurred.”
2.) The AIFMD could see investors move away from offshore funds towards onshore registered vehicles such as UCITS funds on the back of demand for transparent and lower cost funds.
One source who wished not to be named, said: "Investors are increasingly aware of the high fees and level of performance in the alternative fund world and this is going to have to change at some point soon."
3.) Regulatory reporting will need to be undertaken by all AIFMs.
PWC’s Lee adds: "Even if this [regulatory reporting] is outsourced to a service provider, the expectation is that managers have detailed oversight and an understanding of each field, any interpretations and calculations. For those managers who do not outsource this on-going regulatory burden, a number of more difficult fields are being worked through, including the detailed calculation of leverage using the derivative calculation methodology under AIFMD, liquidity management and stress testing.
4.) The first batch of reports [under the reporting requirements] from AIFMs are to be submitted no later than 11th September 2014, according to the Central Bank.
5.) However, AIFMs subject to an annual reporting requirement have not been afforded an extended deadline for their first reports. Thus, information for the period ending 31st December 2014 must be submitted by 31st January 2015.
6.) UK firms not authorised by the FCA as full scope AIFMs cannot actively market to EEA investors.
Andrew Shrimpton, global head of regulatory compliance at Kinetic Partners, said: “What is imperative to understand however, is that UK firms that are not authorised by the FCA as Full Scope AIFMs, or that do not have the required EEA (Article 36) registrations, cannot actively market to EEA investors apart from UK investors subsequent to today (22nd July).”
7.) AIFMD has brought risk management on par with the portfolio management function.
Peter Cripwell CEO and Mark Fitzpatrick COO at RiskSystem, a risk management solution provider for investment managers, said that: “AIFMD is very prescriptive and broad. Make sure your risk function at least covers market, liquidity, counterparty and credit risk at a minimum. Regulatory reporting under AIFMD (Annex IV) is burdensome. Ensure your regulatory reporting solution is comprehensive and robust. Approximately 60-70% of the required data is risk related so risk providers are a good place to start.
“AIFMD codifies what was effectively best practice in risk management. Investment managers no longer have a choice as to whether they should have a risk management function or not – risk management is hereafter enshrined in legislation,” they said.
8.) Beware the fines!
RiskSystem’s Cripwell and Fitzpatrick added: “We have no doubt that large fines are coming. The regulators are showing their mettle similar to how they have shaken up the European banking industry over the past few years e.g. with the banking stress tests and single supervisory mechanism (SSM) for the euro zone.”