• AIMA calls EC hedge fund Directive "confusing" and "unworkable"; launches steering group to mobilise lobbying campaign
  • Hedge fund managers fear proposed limits on borrowing and restrictions on offshore-domiciled funds
  • Hedge funds consider relocating to Switzerland

The Alternative Investment Management Association (AIMA) is leading a lobbying effort to get the proposed EC Alternative Investment Fund Manager (AIFM) Directive re-drafted following an outcry from the industry.

In a statement, Andrew Baker, AIMA CEO, said that the draft Directive had created "enormous confusion" and in its current form could be "unworkable." Baker added that AIMA was not opposed to the Directive "per se" but wanted it to be "proportionate" and "realistic."

Hedge funds have several concerns with the AIFM Directive. One (see s. 3.5.5) is the Directive's intention to give the European Commission power to set leverage limits on funds with "systemically high" leverage and to also give national regulators additional powers to restrict leverage of individual managers in "exceptional" circumstances. Hedge fund managers fear that such borrowing limits would rule out many of their trading strategies.

Another concern is the third-country rules (see s. 3.5.8). These rules will prevent funds domiciled outside the EU from being marketed within the EU unless the regulatory framework in the third country is equivalent to the EU framework (a three-year transition period will apply). The third country will also have to be signed up to the OECD Model Tax Convention on information-sharing. As many UK hedge funds are domiciled in Cayman, favoured for its tax regime and light-touch regulation, this could have far-reaching consequences, possibly forcing funds to relocate onshore.

The potential cost of implementing the rules is also a source of discontent. Because of the large amount of disclosure requirements, some have estimated the Directive could cost UK hedge funds up to £3 billion to implement.

Following publication of the Directive, several hedge fund managers have expressed their intention to leave the UK and relocate in Switzerland (outside the EU) or elsewhere. In a recent interview with Reuters, David Stewart, head of Odey Asset Management, said in some cases hedge funds would "have to leave" the UK because of the proposed borrowing limits and the restrictions on overseas funds marketing themselves in the UK.

To be implemented, the Directive must first be passed by the European Parliament and European Council, which gives significant scope for amending the Directive at the Committee stage, where it will be scrutinised by the Economic and Monetary Affairs Committee.

To mobilize effectively, AIMA has launched a steering group to coordinate a global campaign against the Directive. It is also calling on members to provide data to help it make an impact assessment, determine what lobbying meetings are taking place and create connections to points of influence within the European Parliament and European Commission. A series of initiatives will be announced shortly.

For more information on AIMA's campaign, click here.

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