Editor’s Letter – Issue 110

December 2015 | January 2016

HAMLIN LOVELL

AIFMD is still being shaped, as was discussed at the ALFI European Alternative Investment Funds Conference held in Luxembourg in January 2016.

ESMA should decide by June 2016 if the third country passport already granted to Jersey, Guernsey and Switzerland, can be extended to one or more of the USA, Hong Kong, Singapore, Cayman Islands, Bermuda, Canada, Australia, Japan and the Isle of Man. But the passport currently entails financial and bureaucratic obstacles that make ‘visa’ a more appropriate moniker than ‘passport’. AIMA has raised concerns about regulators charging fees, which add to costs of management time and service provider advice. National Private Placement Regimes (NPPRs) also impose costs. Even the biggest hedge fund managers and platforms need to prioritise resources, and some only choose to use passports or NPPRs, or both, in a handful of the major fund markets. Some larger allocators access some strategies via managed accounts outside AIFMD scope. But in many EU member states, those reliant on funds face a choice of alternative funds restricted to managers prepared to navigate the legal vagaries of disparate reverse solicitation regimes, which sometimes force managers to spurn investors. ESMA could opine on these obstacles that are, arguably, making the EU a travesty of a single market for alternative funds located in Europe – let alone those outside it.

ESMA should also soon firm up AIFMD asset segregation rules, which are particularly important for some leveraged strategies. Trade-offs between the degree of segregation and the cost of leverage have become more acute as bank balance sheets have been squeezed. Professional investors should continue to be free to weigh the benefits of cheaper leverage against the risks of increased re-hypothecation and reduced depositary liability. Many regulators take the paternalistic view that retail investors investing via UCITS need more protection, though they may be able to access Retail Alternative Investment Funds (RAIFs) (not to be confused with Luxembourg’s new Reserve Alternative Investment Fund!) in some jurisdictions. Sweden – which may rank second only to the UK for EU hedge fund assets – has, for many years, given retail investors access to hedge funds.

If the distribution landscape is anything but harmonised, ESMA has an ongoing mission to increase harmonisation in the interpretation of regulations, for both UCITS and non-UCITS funds. Here, we wonder if Germany’s apparent warming to direct lending funds may blaze a trail. Germany has not, historically, been perceived as the most hospitable place for hedge funds, but has recently started allowing local funds to originate loans without facing cumbersome bank regulation. Additionally, Germany’s interpretation of Solvency II now permits insurance companies to invest in debt and direct lending funds. Applying this throughout Europe could be welcome. Many smaller companies remain starved of longer-term funding, and with trillions of euros of government debt offering negative yields, many insurance companies vitally need alternatives to meet their obligations to policyholders.