AIFMD’s Impact on US Hedge Funds: An Expert's View
Last week, we hosted a webinar covering AIFMD’s impact on US based hedge funds. The event featured Bill Prew, Founder of INDOS Financial Limited, and provided a high level overview of the changes that AIFMD will potentially bring to the alternative investment industry. Prew specifically focused on how US based managers will be impacted by this legislation. Read on for a summary of the main topics covered during the event, including an overview of AIFMD and the considerations and upcoming changes for US managers.
About the Expert
Bill Prew is the founder of INDOS Financial Limited. Before founding INDOS, he was the chief operating officer at James Caird Asset Management, a hedge fund with offices in London and New York. He has also served in various senior roles at Barclays Global Investors and PricewaterhouseCoopers. Following a summary of the information presented by Mr. Prew during our recent webinar.
Overview of AIFMD
Beginning on July 22nd, 2013, The Alternative Investment Fund Directive, also known as AIFMD, will go into full effect throughout all 27 EU member states. AIFMD is an EU regulation of alternative investment fund managers and alternative investment fund (AIF) such as hedge funds and private equity funds that are either managed or based within the EU or marketed to EU investors. The directive places them under the jurisdiction of an EU regulatory agency. With some exceptions noted below it will be challenging for any fund to fall outside the scope of AIFMD and not be considered an AIF, regardless of their legal form. The directive encompasses many key tenets, described below:
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An AIF is broadly defined as any non UCITS vehicle that raises capital from a variety of investors. The majority of hedge funds, fund of hedge funds, private equity funds, real estate funds, infrastructure funds, and commodity funds will be considered AIFs.
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There will be exemptions for certain funds, such as single investor funds or managed accounts (both subject to certain conditions), as well as family offices.
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The majority of Cayman Island hedge funds, whether master or feeder or in corporate or limited partnership form will be designated as AIF. This is important to consider because several US managers manage Cayman funds in order to target their marketing efforts towards European investors.
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Each AIF must be assigned an individual alternative investment fund manager (AIFM). An AIFM is considered any business that delivers portfolio management and risk management services to one or more AIFs. The designation stands regardless of where the business is located.
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AIFMs do not have to be EU managers to be considered AIFMs. If a US manager is providing an AIF with portfolio management services or risk management services, they will be considered a non-EU AIFM. Every AIF must possess a single AIFM.
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US based firms that are only engaging in US business will be designated as non-EU AIFMs under the AIFMD.
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It is essential that US entities with EU affiliates examine which entity will be considered the AIFM, due to the fact that the regulations governing EU AIFMs are significantly more burdensome.
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The decision regarding which entity will be considered the AIFM should largely be founded on the degree to which investment management functions (defined by the directive as being portfolio management and risk management) are performed in either the US or by an EU affiliate.
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US firms managing an EU-based AIF or marketing a non-EU based AIF to EU investors will be caught by AIFMD.
Which US Managers are within Scope?
The level to which US managers are impacted depends on whether they manage EU AIFs or market non-EU AIFs to European investors. If US managers are not marketing their funds to EU investors, then they should fall outside the scope of AIFMD and will not be impacted by the regulations. When determining whether your firm and funds are within scope, keep the following in mind:
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According to the AIFMD, marketing is defined as a “direct or indirect offering or placement at the initiative of the AIFM, or by another firm acting on behalf of the AIFM.
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Another key area to look out for is passive marketing, also known as reverse solicitation. In this case, investors contact the manager directly to express interest in the AIF. Reverse solicitation is considered outside of the scope of AIFMD. Managers who engage in this type of marketing should have clear practices and controls in place to ensure their efforts are not viewed as active marketing.
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US managers not marketing their non-EU or EU funds to EU investors should not be subject to the AIFMD regulations even if EU investors occupy the funds.
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EU countries employ different laws governing direct marketing to professional investors through national private placement regimes (NPPR). This will be the only route to actively market to EU investors, at least until 2015. Also, in many European countries private placement is not allowed, so it’s essential that managers are familiar with the rules of the particular EU country in which they intend to market.
What Will Change?
With the onset of AIFMD, managers can anticipate a variety of changes that will characterize the alternative investment industry. Beginning on July 22nd, 2013, US managers marketing an EU AIF or a non-EU AIF in an EU state under NPPR must satisfy certain transparency and reporting requirements. These include:
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Making disclosures to their investors pre investment;
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Publishing an annual report for the pertinent AIF and;
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Reporting to national regulators in the countries that AIF is being marketed into.
The Future
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From July 2015, there is a possibility that EU managers will be able to access the pan-European marketing passport subject to becoming authorized under the AIFMD and complying with the full requirements of the directive.
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From 2015 onwards, non-EU AIFMs managing EU AIFs may also be required by the AIFMD to become authorized. In this case, they would also be able to access the EU marketing passport.
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From July 2018 onwards, there is the potential that the existing NPPR may cease altogether. In this case, managers with the desire to market an AIF within the EU would need to be authorized under AIFMD in order to access the EU marketing passport.
The AIFMD is a complex regulation and US managers should consult their professional advisors for further specific advice as to how it will impact their business.
For more on hedge fund regulations and AIFMD, check out these articles:
