These are the questions that were discussed during our KPMG Global Roadshow in Boston, Dallas, New York, San Francisco and Los Angeles.
From a regulatory perspective how does AIFMD open up European Institutional money to US alternative managers?
Today the US alternative managers do not have a passport to market their NON EU products to European institutional investors.
There would be a decision in 2015 about whether to extend the passport that exists for EU managers to non EU Managers. What we note today is that – if they extend the passport – Non-EU Managers will have to comply with the full AIFM Directive (risk management, valuation, remuneration rules, reporting and much more).
Today there are several options already open to US Managers.
- The first option is to establish an AIFM in the EU. This is a fully capitalized entity with substance, staff and meeting all other requirements.
- However what we see today as a market offer is the emergence of several Third party AIFMs (called “hosting” solutions). The US asset manager would manage the portfolio and the AIFM would do Risk Management, reporting, notification and so on. With this solution, the US Manager can passport his EU products to institutional investors across the EU without the complexity of establishing a full AIFM with the required substance.
- The use of a platform l- such as renting a compartment of an existing AIF that could also work as a feeder of a non EU master – also seems to be a good solution for small and medium non-EU managers that do not view the EU as a key market.
US Managers need to define a strategy which will really depend on the country and the type of investors they target. For example, institutional investors like insurers or pension funds in France and Germany would only invest in regulated products, so AIFMD would open up the door to these countries for US AIFs funds while some countries like UK, Sweden and Netherlands seem to be willing continue with their Private Placement regimes which could be a less difficult option for Non-EU managers.
What solutions best fit the different kind of US Managers?
During our Roadshow, we met three types of US-Centric clients:
- Large clients who have an operational footprint and client base in Europe. Many have decided to go with applying for full AIFMD status by July 2014, probably influenced by their European colleagues. Even if AIFMD reporting is considered as part of the game, there is little consideration as to its real impact or consequences for them. Those clients hope to avoid reporting or tend to see reporting as an afterthought.
- Large clients with a significant EU client-base but a small presence in the EU tend to opt for a National Private Placement Regime (NPPR) to allow them to operate after July 2014 for at least some time. They have “substance” issues and may consider a 3rd party ManCo approach instead. They will need reporting solutions soon and will probably look to their US providers.
- Smaller clients with a limited footprint in the EU are actually waiting to see which approach they will roll out. Keeping informed is their first strategy before engaging in whatever direction, sometimes considering exiting EU marketing to avoid reporting under NPPR.
How does National Private Placement Regime (NPPR) work?
Whilst non-EU managers are not subject to most of the AIFMD requirements directly, because the regulation was written with an EU manager focus, they are however subject to transparency requirements, in particular in the System Risk reporting to regulators (Article 24). Under NPPR, managers must report to regulators in each Member States where they market funds. The scope and level of reporting is currently unclear – member states have no harmonized view on the requirements of such reporting, for example the timing of the reporting is not specified, additional reporting may be requested. In addition, many Member States have different registration procedures and requirements for non-EU managers. In the UK, the level is deemed to be “very easy” in comparison with Germany, for example, making it harder for EU-managers. Finally, they may face additional reporting obligations by Member States.
Is Reverse Solicitation a viable solution for small US boutiques?
During our Roadshow, US Managers asked us a lot of questions about the Reverse Solicitation mechanism. In a nutshell, it allows US Managers that are not actively marketing to European investors to remain out of scope of the AIFM.
However, there is significant legal paperwork and risk management to be assessed. Reputational risk such as issue on performance can be jeopardized. There is also the risk of an incorrect contract being signed if for example the selling team is not trained and aware of the rules.
This solution may still be viable in certain countries but is not a distribution strategy. In France for example, you can forget about this if your fund has at least three French investors.
Can Hedge Funds operate under the UCITS regime. What are the pros and cons?
Some of the typical Hedge Funds strategies (like long/short, CTA) can still be replicated under the UCITS product through the use of derivatives. Investors are then benefiting from the large distribution network, thanks to the global brand UCITS, which is not only recognized in Europe but also in Asia and Latin America. If they choose this option, they won’t be subject to the heavy AIFMD requirements on remuneration and reporting. If they choose this option, they won’t be subject to the heavy AIFMD requirements on remuneration and reporting – or at least until 2016 for the remuneration part by when the UCITS regulation will be updated.
During the roadshow, our Global Chief Economist, Constance Hunter, highlighted the challenges that Alternative Investment Managers are facing to make their AIF products a real solution for long term pension products: asset allocation of alternative investments needs to be more diversified and illiquid AIFs products by nature need to be transformed into liquid products for defined contribution pension plans.
UCITS hedge fund products perfectly fit these objectives. They have actually proved to deliver performance with reduced volatility. What else?
However, since the AIFMD brand has been created, we clearly see this trend and regulator’s wish to have simple products that anyone can understand fit into the UCITS framework and the more complex products like Hedge Funds rather fit into the AIFMD space.