Spring Lunch Series Recap: AIFMD

Spring Lunch Series Recap: AIFMD

Lunch Series Recap: AIFMD
By George Ralph, Managing Director, RFA

Last month, we hosted our second annual spring lunch series at Claridge’s in Mayfair, London. This year’s series was focused on several of the regulations currently affecting the European financial services sector. Some of the regulations, such as MiFID II, are about to be introduced, while others such as AIFMD, have been around for some time, but have continued to cause challenges for hedge fund managers. Over the next several blog posts, I will be delving into each regulation and what it means for your business. First up: AIFMD.

The AIFMD, which stands for the Alternative Investment Fund Managers Directive, has been around for several years, but is still causing challenges for hedge fund managers globally, and especially in Europe, specifically when we look at the regulatory barriers to market entry. While the AIFMD is not by any means a new regulation, firms are still grappling with its impacts on their business. It was reported in May 2014 that less than 33% of EU member states were successfully complying with the AIFMD implementation.

The AIFMD was first introduced in July 2011 by the Official Journal of the European Union. The purpose of the regulation, which was first introduced after the global financial crisis, is to help reduce risk in the industry, increased transparency, protect investors, and fill regulatory gaps. This was the first piece of legislation to provide regulatory oversight to hedge funds in the EU. The AIFMD covers several areas, and requires fund managers to adhere to specific disclosure and reporting rules to the relevant authorities.

Some of the core areas impacting fund managers under the AIFMD require managers to:

  • Follow specific business practices, such as exercising strong risk management, mitigating conflicts of interest, and disclosure of risks and conflicts to investors and the appropriate authorities
  • Appoint depositories and custodians for the safekeeping of investments
  • Enact specific controls over functions including portfolio and risk management
  • Adhere to restrictions set by regulators pertaining to leverage and other potential risks

The implementation of AIFMD poses complex changes that hedge funds need to be aware of. Under AIFMD, some fund managers, depending on their business models and AUMS, had to seek re-authorisation under the regulations. For other firms, it meant that they were being regulated for the first time. In July 2013, certain funds had to obtain EU-wide marketing passports to market themselves to professional investors.

Like many of the regulations that have been introduced into the EU by regulatory bodies, strong risk management practices remain a central component. If you are interested in learning more about risk management best practices, be sure to request a copy of our recently updated risk guide.