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Alternative Investments - October 24, 2011

Response to ESMA Consultation Paper to Implementing Measures for the AIFMD

Several regulatory initiatives are being taken in Europe and recommendations that will reshape the investment fund industry are being made. Existing regulations, such as UCITS, are being reshaped; the need for a regulation of depositaries has been acknowledged, and since the G20 there has been more focus on the monitoring of hedge funds.

Many of these regulatory needs have converged in the alternative investment fund managers’ directive (AIFMD), which means that the AIFMD could become a unique framework that settles most of the questions related to the common framework for funds, fund managers and depositaries. However, it must avoid the risk of the AIFMD not being applicable if it appears as a patchwork of diverging goals that have been grouped into a single directive solely for political reasons.

In previous research carried out as part of the CACEIS research chair at EDHEC-Risk Institute on "Risk and Regulation in the European Fund Management Industry" we have carried out an extensive survey of industry views on structuring hedge fund strategies as UCITS ("Are Hedge-Fund UCITS the Cure-All?" March 2010) and produced a comprehensive report on non-financial risk and performance in a changing regulatory framework in Europe ("The European Fund Management Industry Needs a Better Grasp of Non-financial Risks" December 2010).

The present position paper addresses the measures for implementation of the AIFMD. The AIFMD must afford a convergence of views between civil-law and commonlaw regulations and cultures. It has specified many of the depositary duties and obligations, with sufficient details for an implementation in civil-law countries, while retaining sufficient margin for manoeuvre for an application in common-law countries.

As the AIFMD only facilitates the marketing of funds but not their distribution, a confused, inadequate or costly directive could end-up pushing hedge fund managers to either remain in the unregulated space or switch to the flexible UCITS framework, which allows the packaging of hedge fund strategies as NewCITS.

Another criticism of the current directive is that too little attention has been paid to the necessary transparency for investors. Lastly, the AIFMD and ESMA proposals fail to ensure uniform application of many legal principles (such as the fiduciary duties of the investment firm) in the various countries. A specific section should be dedicated to ESMA’s powers of law enforcement and guidelines for a homogenous, practical regulation of fiduciary duties.