How are your clients feeling about a July 2013 deadline?
Keith Hale: Given the reporting format is not finalised yet, and when you look at things as fundamental as pricing, taking into account the new cost of the depository liability—there appears to be much to do before July. As a result, there is likely to be a last-minute dash to the finish line. There is arguably less of an issue for the fund managers, because if they want to launch a new fund, they have or will probably do it before the July deadline. Then the fund has another 12 months before it has to convert to the new alternative investment fund regulation. For the service providers, the deadline may be more of an issue, because if a client does want to be first to market and launch a new alternative investment fund after 22 July, then the administrator needs to be completely ready.
Alan Raftery: From an industry perspective, the European Fund and Asset Management Association (EFAMA) said the deadline was too ambitious and it wasn’t feasible to develop standards for cooperation agreements with member states and non-EU regulators in the given time frame. That said, the industry seems to have accepted and is working towards this deadline.
Will AIFMD become an international standard for alternative funds, similar to the UCITS brand?
Hale: We are currently in the middle of a survey that is asking just that question of asset managers, fund managers and service providers. Interestingly, nearly 60 percent of respondents have told us that the Alternative Investment Fund Managers Directive (AIFMD) is going to become a global standard like UCITS. The real question is, why? If you look back in history, it was only really only with UCITS III in the early 2000s that UCITS really began to take off as an international brand. As it went through its various incarnations, UCITS gained traction, and it’s likely that AIFMD will follow the same pattern—the directive will need to learn lessons and adapt, possibly over a number of iterations.
Alan Raftery: With the likes of the Cayman Islands and Bermuda progressing with their cooperation agreements with Ireland, it has the potential to become more of a global brand. A lot depends on how it is sold to and how it is perceived by investors. Will they see it as UCITS for hedge funds?
What kind of local interpretation do you think will be given to UCITS V and AIFMD when each member state implements the directive?
Raftery: AIFMD could conceivably be open to interpretation, but the feedback we’re getting is that every jurisdiction will implement in the same way. If you look at UCITS V and AIFMD, they are broadly the same in their measures; they protect investors and reduce risks. As we know, UCITS V in part was a direct response to AIFMD, in order to bring itself in line with the directive. Standardisation of implementation will be positive, as it will allow the global players to put the same models across all jurisdictions.
Hale: I was on an industry roundtable recently where this topic came up. There were depositories present, as well as global custodians and administrators, and the consensus was that although, potentially open to interpretation, the directive will be implemented consistently across jurisdictions in terms of depository liability, and so on. There will not be fundamental differences and therefore no opportunity for regulatory arbitrage across locations.
How is Ireland tackling the trend of convergence between traditional and alternative funds?
Hale: Globally, convergence continues to be a growing trend. Increased institutional appetite for hedge funds is making them look for long-only in their characteristics (daily liquidity, risk management, and so on), and we have also seen retail appetite for absolute return funds—which are making long only funds take on more hedge funds features such as performance fees. This increased convergence is demonstrated by the figures we see on our platform. Given that we are traditionally more widely used in the long only market, we have seen a number of assets with performance fee equalisation for example on them double in the last year alone. So at a macro level, convergence is a growing trend, in our opinion.
Raftery: From a regulatory perspective, the Central Bank of Ireland has created a new retail investor alternative investors fund (RIAIF) structure, which provides a framework for managers to access retail investors. This provides products somewhere between hedge funds and UCITS funds. The product is positioned to benefit from the convergence of alternative and traditional funds. RIAIFs have more restrictions than a hedge fund, but less than a UCITS fund.
From a company perspective, the majority of the projects we are working on involve the consolidation of alternative and traditional funds onto our platform as our clients service all fund products on one application. This indicates that service providers aim to offer the same service to clients no matter what the product offering.
Hale: From a retail perspective, it is still questionable whether investors will take up this new RIAIF structure, due to lack of awareness and distribution to retail investors.
Are you seeing any redomiciling of funds into Ireland or other jurisdictions?
Hale: Currently we’re seeing a lot of growth in both Ireland and Luxembourg on our platform (25 percent in the last year), but that is not just down to re-domiciliation, that’s due to our clients migrating new wins, acquisitions and system consolidations —so is probably not the most accurate gauge. That said, our expectation is that Ireland and Luxembourg to be the two main beneficiaries of AIFMD. Managers fundamentally are going to have to bring funds onshore to ‘market’ themselves in Europe under AIFMD. Eighty-nine percent of respondents in our survey said that they thought Luxembourg would be in the top three domiciles for AIFMD, and 73 percent said Ireland. It is difficult to measure amount of re-domiciliation causing of the growth we are seeing on Multifonds, but re-domiciliation will almost certainly happen, in order to satisfy spirit of the AIFMD regulations.
One fly in the ointment could be for non-EU investors; some funds might choose to domicile funds outside of the EU so they don’t have to be burdened with the additional costs of depositories and so forth that are associated with AIFMD.
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