Kinetic Partners, the leading regulatory consultancy to the UK hedge fund industry, estimates that the proposed EU Directive on Alternative Investment Fund Managers (AIFMs) will cost the UK hedge fund industry up to £3bn to implement.
The directive will impose additional costs on managers in terms of requiring them to hold additional capital, implement complex new fund reporting and risk management systems, retain independent valuation teams, legal advisers and other professional service providers, and put in place extra staff and infrastructure to cope with burdensome new disclosure requirements.
Kinetic Partners estimates that the cost of these changes for a typical UK manager will be several million pounds per year. In addition, the hedge fund advisory industry, including administrators, auditors, and risk managers, will have to spend heavily, first to understand and next to comply with the directive.
Kinetic believes the cost to the industry to comply with the proposed directive will be between £2-3 billion in the first year, and several hundred million pounds annually thereafter.
Julian Korek, founding member of Kinetic Partners, said: “This ill-considered directive would be disastrous for the UK hedge fund industry, and prove hugely costly to the industry for almost no apparent benefit. This is the European equivalent of the Sarbanes-Oxley Act – a knee-jerk ‘solution’ to non-problems that will hamstring UK-managed hedge funds and prevent them playing an energetic and much-needed role in financing economic recovery. Worse still it is likely to stunt investment in the UK by international funds as they are likely to consider the costs and intrusions disproportionate to the potential upside – further stifling the recovery.
“The Turner Review and the G20’s own enquiries found that the hedge fund sector played a peripheral role in the financial crisis. It is also wrong to say that UK-managed hedge funds are lightly regulated – they are regulated by the FSA just like any other investment manager, and there has been no case in the UK of a significant fraud perpetrated by a hedge fund manager.
“The global hedge fund sector should be regulated more heavily than is currently the case. The G20 summit rightly called for mandatory registration of hedge fund managers and for managers to provide regulators with sufficient information, so that risks could adequately be assessed and monitored. The summit further called for national regulators to work more closely together on standardisation, transparency and information sharing.
“Proportionate and sensible regulation of the global hedge fund sector is to be welcomed, but the EU directive is neither of these things. Furthermore, this directive has been issued without extensive consultation or any attempt at a cost-benefit analysis.
“Finally, the directive amounts to a huge waste of time for those affected. Two years ago, hedge funds invested heavily to comply with Europe’s Markets in Financial Instruments Directive (MiFID) which this new directive threatens to supersede. The UK-based hedge fund industry spent tens of millions of pounds to comply with MiFID, which now looks like money down the drain. It’s tragic.”
