Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
11/05/2011
Comment: Andrew Baker
Work on the Level 2 implementing measures of the AIFM Directive is now well advanced. Given that the official publication of the final Level 1 text has been delayed and is only expected to take place in June, it seems that the European Securities and Markets Authority (Esma) will be given more time to develop its advice. Currently, it is expected to finish its work in November 2011, which should provide it with roughly two extra months to finalise its technical advice.
Esma has divided the work into four separate sub-groups or taskforces: depositaries; scope and types of AIFM; general operating conditions; and transparency/leverage/risk/liquidity. All taskforces are autonomous, but share a common deadline for the publication of the draft technical advice, which should most likely come out in June or July (originally mid-May) for a two-month public consultation period.
The taskforce on depositaries, chaired by French regulator the AMF, is proceeding at a good pace. The AMF has been provided with a great deal of information from Aima and the hedge fund industry to assist with its work. Among the issues it is addressing are the scope of the depositary’s custody obligation in a counterparty relationship; the treatment of cash; the definition of ‘financial instruments’ that can be maintained by the depositary; the definition of loss; and the scope of depositary liability.
The taskforce on scope, chaired by the Central Bank of Ireland, is working on the issue of typology of hedge funds and other alternative investment funds. The Commission has indicated that it would wish to have some form of typology underpinning the Directive, though others have indicated they would prefer there to be no hard and fast categorisation in this area. This is challenging work.
The most difficult topics in the taskforce on general operating conditions (chaired by German regulator BaFin) relate to the issue of own funds and delegation. The work in the other areas is very likely to draw heavily on many existing Ucits and/or Mifid provisions. The key issue in the delegation area revolves around the definition of a letterbox entity and whether the fund manager is obliged to carry out the activity of portfolio and risk management itself or whether these activities can be outsourced in their entirety to third parties, with the manager maintaining full control and oversight.
On the issue of own funds, the main difficulties relate to the determination of the extent additional capital and/or professional indemnity insurance must be held in order to cover potential professional liability risks resulting from the activities of the fund manager.
On leverage, it appears that the FSA-chaired taskforce is seeking to work on a structure which makes use of several methods of leverage calculation, including the commitment method which is used in the Ucits space.
The taskforce has embarked on a search for yet another method of leverage calculation which would not have the obvious drawbacks of the commitment approach (exaggeration of leverage by using notional exposures for derivatives). We have held a number of meetings with the FSA and provided the team with examples of ways different fund managers approach calculation of leverage depending on their strategies. Suffice to say there is no single method that could be applied universally.
Aima executives and representatives have met or spoken to the regulators responsible for the Level 2 provisions on numerous occasions. We are seeking to ensure that the taskforces organise as many meetings and consultations with industry representatives as possible between now and the publication of the draft technical advice, expected in June/July. Our intensive and constructive engagement on the Directive will continue until the process is concluded.
ANDREW BAKER is the chief executive officer of Aima, the Alternative Investment Management Association
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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