The purpose of the CACEIS "Risk and Regulation in the European Fund Management Industry" research chair is to analyse the major risks faced by the main actors in the European fund management industry due to their practices and the regulations; measure the importance of these risks and their impact on the actors’ solvency and business models; and propose rules and solutions that will enable the risk of the actors in the fund management industry to be limited.

The chair is under the scientific responsbility of Noël Amenc, director of EDHEC-Risk Institute.

[Consult the press release announcing the launch of the research chair (English version): 07/09/09]

[Consult the press release announcing the launch of the research chair (French version): 07/09/09]

Background:

The financial crisis that we have been experiencing for the last two years has had some unprecedented consequences for the fund management industry.

Up until now, financial crises only had negative consequences on the revenues of industry players by affecting the volume of assets managed on behalf of investors, with the latter being alone in bearing the risks of their investment. The most recent crisis has impacted not only the revenues, but also the operating expenses of third-party asset managers.

The fund management firms and their service providers have had to take on some of the costs relating to the risks of the investments that they manage, keep under custody, price or audit. More specifically, this crisis is synonymous with a transfer of a portion of investor risk towards the providers of investment and related services.

This transfer is the result of two phenomena.

The first is related to the reputation risk that has led a significant number of fund management companies, either alone or with the support of their major shareholder, to assume some of the cost of liquidity risk for open-end funds invested in assets that soon became impossible to trade or were traded at valuations that were unacceptable for funds that are sometimes presented as treasury management instruments.

Even though the legislative texts and the regulators were not forcing fund management firms to take on this risk, one is obliged to observe that the desire of the latter to preserve their reputation and protect both the assets managed and the associated revenues led them to take on considerable costs for this risk. This same reputation risk, and sometimes a legal threat calling into question the quality of their work in the area of selecting hedge funds, has also led companies that manage funds of hedge funds to compensate victims of the Madoff fraud.

The second phenomenon is the application of texts and regulations whose consequences for service providers had not been truly taken into account until now. This is notably the case of texts that bring a large number of responsibilities to bear on the custodian, including the obligation to return assets, which was emblematic during the Lehman and Madoff collapses of the risk that it represents for service providers. The custodian’s business model is based more on volume than on margins, and as a result they have to hold a considerable amount of assets to be returned. They consequently face potentially significant risk. This second phenomenon is all the more important in that market regulators have tended to consider that good risk control for third party fund management was based on separation/segregation of the activities and, often, the actors, and on the existence of a solvent actor as a last resort. This solid actor was seen as being the custodian, who is covered by the extensive regulation of bank status, and as such seems more solid than the fund management firms, notably when the latter are not part of a banking or insurance group that is governed by demanding prudential regulations.

In the end, both the domestic European regulators and the European Commission, who wish to avoid increasing the cost of investment management and reducing the amount of competition by requiring significant capital of fund management firms, have continually transferred risk towards service providers who were not directly involved in the act of management which is, paradoxically, the source of the risk. The calendar of European reforms relating to the crisis, and notably the difficulties that third-party fund management has experienced in the areas of asset security, pricing and compliance with regulation, leads one to believe that this shift in the responsibilities of all the actors in the fund management industry is a durable one that will have a significant impact on the profit and loss accounts of not only the fund management firms, but also of all the service providers who are associated with them.

For EDHEC, it is clear that the reasoning that involved saying that the main economic risk facing the fund management industry was the fall in revenues and that led the regulator to require fund management companies to hold an amount of capital that was intended for operating expenses, will give way to the integration of risk based on volumes, the complexity of the assets and operations, and the legal and contractual obligations of each of the participants in the industry’s value chain.

Research Output:

• Are Hedge-Fund UCITS the Cure-All?; Noël Amenc, Samuel Sender; March 2010

  As part of the CACEIS research chair on non-financial risks in investment funds, EDHEC surveyed UCITS and alternative asset managers, their service providers, external observers, and investors for their views of structuring hedge fund strategies as UCITS. The 437 respondents report assets under management (AUM) of more than €13 trillion. Investment fund managers account for roughly €7 trillion of these assets. In general, the survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as UCITS. For their part, managers of alternative funds are concerned by the uncertainties surrounding the directive on alternative investment fund managers (AIFMs) and may consider packaging their strategies as UCITS. Most respondents, however, fear that structuring hedge fund strategies as UCITS will distort strategies and diminish returns.

  [Consult the press release announcing the results of the survey: 12/05/10]

About CACEIS

CACEIS is a banking group dedicated to institutional and corporate clients. Through offices across Europe, North America and Asia, CACEIS delivers a comprehensive set of high quality services covering:

• Depositary/Trustee-Custody
• Fund Administration and Transfer Agency
• Issuer Services

Key Figures:

• Assets under Custody: €2,120bn / Assets under Administration: €975bn (As at June 30, 2009)
• Standard & Poor's: AA-/A-1+ (As at June 25, 2009)
• 3,730 employees
• 11 countries