With the introduction of the AIMF Directive, however, funds will no longer need to use highly engineered structures to bring complex or illiquid strategies onshore. Under the directive, a manager can implement the same strategy they would in an offshorefund, but without the constraints that create performance drag. They also offer investors the benefit of regulatory oversight and stronger infrastructure, such as independent risk management and depository functions. “UCITS was not made for alternative investments whereas AIFMD is; this makes a huge difference,” says Lionel Paquin, head of Lyxor Asset Management’s managed account platform.
“UCITS can be a regulatory and opportunistic option for some strategies and some investors; on the contrary AIFMD will be the institutional standard for the entire hedge funds space.
“While setting high and new standards in a previously non-regulated universe, the AIFMD framework leaves hedge fund managers free to do what investors specifically expect from them: nimble management, ability to leverage performance and to trade long and short across a large variety of asset classes.”
Hedge funds wanting to market themselves in Europe will ultimately have to comply with the AIFMD and some managers have already begun the process of authorisation. Credit Suisse was among the first to register in Luxembourg and others have signalled their intention to do so.
Fabrice Cuchet, head of alternative investment management at Dexia Asset Management, says: “Hedge funds will need to have AIF vehicles to be active in Europe in the future. Many managers with offshore products are looking for ways to work within the AIFM Directive.”
Dividing lines
A natural split will occur in the onshore hedge fund industry along two lines. Strategies well suited to UCITS will continue to prosper under that more widely marketable framework. Where the constraints of UCITS create performance drag, managers and investors will prefer AIFs. Accordingly, the market will bifurcate to a large degree between UCITS for retail investors and AIFs for professional investors.
This is certainly the direction the regulators are setting. Their efforts to simplify UCITS for retail investors has effectively outlawed the use of commodities indexes and bespoke indices often used to gain synthetic exposure to assets which would not be eligible for direct investment under UCITS.
“Those (funds) will find a new home under the AIFM Directive,” says Donnacha O’Connor, partner at law firm Dillon Eustace. “More funds will find themselves in this position in the future as the UCITS product is further de-risked.”
The AIFMD may also work to ease another bugbear among institutions investing in hedge funds – high fees. As Jean Devambez, head of global asset fund services at BNP Paribas, explains: “Although the costs for investors will increase in the short term as part of compliance with the AIFMD, over the longer term the increased competition allowed by the passporting facility should bring fees down as we see more optimisation and rationalisation.”
The move to onshore hedge funds will only increase as regulators and institutional investors continue to push for greater regulatory oversight and safeguards around alternative investing.
While UCITS is proving more limited in its appeal to institutions, the AIFM Directive presents a more advantageous balance of regulatory oversight without the constraints on managers that hinder performance for all but the simplest hedge fund strategies.
As Lyxor Asset Management’s Nathanaël Benzaken, deputy head of the alternative investments business line, concludes: “ Given they offer a more regulated framework without any limitations on what the manager can do, the question is why not go for an AIF versus the offshore equivalent.”
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