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Hedge Funds Face Compliance Hurdles of AIFMD

Alternative funds selling to European investors must meet ESMA's strict guidelines for trader reporting, risk controls, and valuations -- similar to SEC's Form PF.

With a key deadline for authorizing alternative funds passing in Europe, hedge funds are scrambling to meet new compliance hurdles for trade reporting, risk controls and re-valuations.

By July 22, hedge funds had to seek authorization as alternative investment funds (AIFs) from the European Securities Markets Association’s (ESMA’s), author of the Alternative Investment Management Directive.  

AIFMD is a European-wide framework that regulates the selling of alternative funds. With 34 countries in the EU, compliance can be complicated. “They had to receive their authorization from the relevant regulator depending on whichever country in Europe, they want to distribute their funds in,” said Anthony Belcher, Director EMEA Pricing and Reference Data at Interactive Data. Most firms had to submit their applications by February to ESMA to receive the authorization by July, he said.

As they transition to alternative investment funds, hedge funds are turning to third parties to help them comply with potentially onerous data reporting requirements.

“We are focusing on what are the operational challenges that alternative investment managers and hedge funds need to be in compliance with AIFMD,” said Belcher. Interactive Data is offering AIFMD-specific reference data and analytics to help firms address the transition to AIFMD and comply with it on an ongoing basis.

 “We are really out front on this,” said Belcher. “We have clients live on the service already and we have many clients in test at the moment as well,” he said. Other tech companies including Eze Castle Software, Data Arts and Cordium have rolled out AIFMD solutions.

What are the AIFMD reporting requirements?
On the side of systemic risk, funds need “to explain and go into detail about what assets they are investing in, what leverage they are taking to get that return, and to demonstrate to regulators that they are meeting their requirements on leverage and frequency of reporting,” Beclcher explains.

For example, in order to classify the portfolios of alternative investment managers (AIFMs) into asset type and geographical categories, as defined by ESMA guidelines on data reporting, firms need to access specifically tailored reference data, including relevant codes.  Interactive Data offers customized AIFMD reference data, incorporating ESMA taxonomy to identify and define data items and asset types, the company said in a July 21 release announcing its solution.

One big change is in the area of valuations, which hasn’t been there previously and needs to be a separate function and independent of the portfolio manager, said Belcher.

From IDC’s perspective, the company is providing information around the securities that funds need to have as well as new data items that have come up as a result of the directives, said Belcher. As a Pan European regulator, ESMA has specified new asset and country classifications that are specific to the AIFMD,  said Belcher.

Previously, a one or two person hedge fund could have had the portfolio manager value the fund, illustrates Belcher.“The directive seeks to address conflicts of interest where the valuation has to be an independent function. It can be outsourced to a third party or done in-house but there needs to be Chinese walls,”he said.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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