• According to a report by think tank Open Europe, 46 % of alternative investment managers view Directive "unfavorably"
  • Hedge fund investors will face "massive loss of choice" if Directive comes into force, says report
  • Compliance costs also likely to increase, by 31.5% on average, says think tank

A recent report by think tank Open Europe claims the EU Alternative Investment Fund Managers (AIFM) Directive will cost the hedge fund industry and hedge fund investors billions. 121 hedge funds were surveyed for the research, half of which were based in the UK and who between them have $243 billion assets under management.

The survey found that only 2% of alternative investment investors supported the Directive, while 46% viewed it unfavourably. The most significant negative impact for investors says the report will be the "massive loss of choice" for EU investors if the Directive is implemented in its current form. As proposed, the Directive places major barriers on both investing with EU fund managers who use offshore funds and investing with non-EU hedge fund managers (see articles 35 and 39 respectively). According to the report, 84% of hedge funds managed by EU-based hedge fund managers are domiciled outside the EU, while eight out of 10 hedge fund managers are based outside the EU. Therefore, "unless a series of international agreements are struck," says the report, "these funds and managers will be cut off from European investors.

The report highlights recent findings from the Alternative Investment Management Association that claimed the loss of choice for investors - and resulting reduction in investor returns - could cost the European pension industry $25 billion.

The survey also forecasts a large increase in hedge fund compliance costs - 31.5% on average - if the Directive comes into force. The estimated one-off costs for the UK hedge fund industry are between £354 million and £423 million. The annual recurring costs are estimated at between £125 million and £149 million. The increased regulatory costs will be passed on to the investors, says the report. It also found evidence that the Directive is already having an impact: 8% of hedge funds surveyed had delayed a launch of a fund because of the Directive.

Looking at the broader impact of the Directive to the EU economy, the report also claims that implementing the Directive would have a detrimental impact on tax revenues if the Directive caused hedge fund managers to stop marketing funds to EU investors or caused them to leave the EU altogether. It found that the U.K. hedge fund industry currently employs 9,816 people and contributes around £3.2 billion in tax revenues each year.

Rather than encouraging offshore funds to move onshore, the report found that 27% of hedge fund managers said they would be more likely to move their funds offshore. Only 23% said they would be more likely to move their funds onshore.

The report makes four recommendations that it says will improve the Directive:

  • Separate between different types of funds, and include exemptions for funds with little relevance for systemic risk or a specific provision, and for funds that operate with small assets under management and/or on a regional/national market only.
  • Free up investors' choice by dropping the protectionist elements, in particular the requirements for various reciprocal agreements with non-EU countries. These should be replaced by a broad requirement for 'prudential regulation and supervision' in the country where the AIF or the AIFM is established.
  • Bring the Directive's organisational requirements in line with existing EU law, i.e. with the equivalent requirements in the UCITS Directive.
  • Scrap the restrictions on specific investment policies, i.e. limits on leverage and the extra requirements on private equity firms; and reduce the Commission's powers to add to or amend the Directive after it has been agreed by ministers and MEPs.

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