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Hedge Fund Readiness for AIFMD Is Lacking as Deadline Approaches

With the July 22 deadline looming, hedge funds are unprepared to meet the AIFMD data reporting requirements, and they worry about compliance costs, two studies say.

With only one week to go, fund managers are scrambling to meet the reporting requirements for the Alternative Investment Fund Managers Directive (AIFMD), and some hedge funds say it will hamper their business.

Preqin, a data and analytics provider for alternative funds, released a study today based on a survey of 150 hedge fund managers; 59% of respondents said the AIFMD will hurt the hedge fund industry, versus 53% who said so in December 2013 and 29% in December 2012. In the latest survey, 22% said that the regulation will have no impact, and only 20% said that it will have a positive impact.

"As the 22 July 2014 authorization deadline for the AIFMD approaches, Preqin's survey reveals that the proportion of managers that feel the AIFMD will have a negative impact on the hedge fund industry is at an all-time high," Amy Bensted, Preqin's head of hedge fund products, said in a press release. "Fund managers have been endeavoring to meet or navigate the regulatory burdens imposed by the AIFMD over the past 12 months, but many are still concerned about both the cost of compliance and the risks arising as a result of the lack of clarity or guidance."

US hedge fund managers are the most negative toward the AIFMD, with 71% telling Preqin it will hurt the industry. By contrast, managers in Europe (excluding the UK) expressed the most positive outlook, with 40% seeing a benefit for the industry and only 45% seeing a negative impact.

This is the second survey to come out this week exposing concerns about the AIFMD. A survey by the data management and automation provider Confluence released Tuesday has found that one-third of fund managers targeted by the directive are not ready to meet the July 22 deadline.

Confluence surveyed 116 asset managers and fund administration service providers between June 16 and July 1, as part of research in the runup to the AIFMD deadline. Alternative firms in the European Union are required to submit their application for authorization.

Lack of preparedness
Thirty-four percent of the respondents said that AIFMs were not very ready or that they were not sure of their level of preparedness for the transparency reporting requirements. On top of the uncertainty about being prepared for the reporting challenges, 28% of respondents said they believe AIFMs are still undecided and are reviewing all options on how to meet AIFMD transparency requirements. Only 16% said AIFMs were "very prepared" ahead of the deadline.

Some fund managers will use in-house reporting solutions, while 22% of respondents plan to use an external solution.

The AIFMD is a broad EU framework. With few exceptions, it covers the management, administration, and marketing of alternative investment funds, according to the Financial Conduct Authority. It impacts those managing alternative investment funds, mainly hedge funds and private equity funds.

"The Confluence survey highlights the lack of readiness within the industry ahead of the AIFMD deadline despite being less than a fortnight away," Melvin Jayawardana, Confluence's European markets manager, said in a press release. "European asset managers and fund administrators face big challenges getting up to speed on the full ramifications of the directive and the scope of work it will require of their back-office operations."

One-third of respondents told Confluence that their single greatest challenge was reporting to local regulators, and nearly one-third identified the regulatory burden as the single most important concern. In a Confluence study released in March, 67% of alternative investment managers highlighted the same concern.

"Managing fund data manually and across multiple in-house systems will be challenging within AIFMD's reporting window, which can be as short as 30 days," Jayawardana said in the release. "However, AIFMD is an opportunity for the investment services industry to address transparency and granularity in reporting."

Compliance costs are top concern
In the Preqin survey, 43% of hedge funds named compliance costs as their primary AIFMD concern. In Europe (excluding the UK), 53% of managers were most concerned about compliance costs.

None of the fund managers said the cost of regulation was lower than expected. Cost exceeded expectations for three-quarters of fund managers in Europe and in "Asia and the rest of the world."

As for the state of readiness, 64% of managers in UK and 58% of those in the rest of Europe said they are already AIFMD compliant or will be by the deadline. Even though they claim to be compliant, 14% of UK hedge fund mangers have submitted their application to the FCA but do not expect their fund to be approved by the deadline.

Forty percent of US managers plan to avoid the directive, since they do not plan to market in the EU.

"Although many European fund managers have already made sure their funds are or will be compliant, many US-based firms have not, and a significant proportion have decided to not actively market in the EU," Bensted said in the Preqin release. "They may instead rely on private placement regimes or reverse solicitation, or simply not look for capital in from EU-based investors. However, with institutions in the EU representing a fifth of all institutional capital at work in hedge funds today, these managers may need to take on the extra stresses required to comply with the AIFMD in order to secure important investor capital."

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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