A Summary of AIFMD and How it Affects Hedge Funds

  • 214 views
Uploaded on

This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments" …

This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments"

These notes focus on AIFMD and its Impact on the Hedge Fund Industry.

http://www.hedgefund-sa.co.za/aifmd

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
214
On Slideshare
0
From Embeds
0
Number of Embeds
2

Actions

Shares
Downloads
7
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. AIFMD Summary Study Notes
  • 2. Brief Overview • The Alternative Investment Fund Managers Directive (AIFMD) arose from a G-20 summit in 2008 that discussed the stability of the financial industry • Composed by the European Commission in 2010, and set into motion July 21, 2011 • Countries in the European Union who will be impacted by AIFMD have been given two years to prepare for its start date on July 22, 2013
  • 3. Products of AIFMD • AIFMD is comparable to the United States’ Dodd Frank Act, but focuses on alternative investment funds (AIFs) • Managers are required to be licensed under AIFMD if they fall within specified domiciles • Managers that qualify for the licensing requirements are: – Managers that manage an AIF in the EU or from the EU
  • 4. Products of AIFMD • Managers that qualify for the licensing requirements are: – Markets an AIF in or into the EU • AIFs can be open or closed-ended funds • If a fund does not fall under UCITS IV, it is considered an AIF
  • 5. Products of AIFMD • Exemptions include: – Joint ventures – Pension funds – Family offices – Holding companies – Securitization special interest entities – Saving schemes – Employee participation
  • 6. Products of AIFMD • Closed-ended funds may be exempt if: – They do not perform any more investments after July 22, 2013 – The fund closes before July 22, 2016 • Topics discussed in AIFMD include: – Changes to banking – Depository requirements – AIFs – How AIFMs need to adapt – Marketing of AIFs – Impacts to offshore funds and some strategies – Deadlines – Tax concerns
  • 7. Products of AIFMD • Administration and transparency help disclose how compliance and accountability will be enforced • Those who manage AIFs outside of the EU may have to make structural changes to accommodate to AIFMD standards
  • 8. Depository Requirements • New depository requirements obligate third party providers domiciled in the EU to administer capital for AIFs • Third parties that are independent of the AIF will be chosen as the depositories – The depository must be domiciled in the jurisdiction of either the AIF or AIFM Overview • Acceptable institutions and requirements • Conflicts of interest involving depositories • Downside for depositories
  • 9. Acceptable Institutions and Requirements • AIFs in the EU register with the managers Member State • Non-EU AIFs can register with an EU credit institution or investment from the AIF’s residence, or with the managers Member State if located within the EU • Non-EU depositories may be used if they follow the strict guidelines set by the EU – This would require the depository to report all holdings for tax purposes, and would be liable to the AIF and AIFM
  • 10. Acceptable Institutions and Requirements • Depositories will have many responsibilities and will be liable for funds being administered – Any losses of capital would be liable to the institution with the holdings • Managers are required to confirm that the depository is adequate for holdings, and holding entities will need to prove they have the required resources to manage the tasks at hand
  • 11. Acceptable Institutions and Requirements • Depositories should consider the risk before deciding to control any amount of holdings – Appropriate fees will need to be charged depending on the risk of holding certain AIFs assets • Prime brokers are allowed to act as depositories if they can prove there is no conflicts that would interfere with operations as a holding agent
  • 12. Acceptable Institutions and Requirements • AIFs take on the liability if they choose to use a prime broker • It may be more affordable to implement a prime broke as a holding agent, but if circumstances were to change dramatically it may be wise to choose a third party depository
  • 13. Conflicts of Interest Involving Depositories • AIFMs who manage more than one AIF are required to have a separate depository for each AIF • Depositories are obligated to a fiduciary duty • If a depository desires, they may also act as a prime broker if there is clear separation from its depository and brokerage functions
  • 14. Downside for Depositories • There is much to be gained in operating as a depository, but potential risk as well that should be considered • AIFMs will be required to clearly communicate between depositories and prime brokers for operations flow more smoothly – Depositories will need to track all trades that occur with the prime broker to know where assets are located at all times, and later register account balances after trading to assure accuracy
  • 15. Downside for Depositories • AIFMs will be required to clearly communicate between depositories and prime brokers for operations flow more smoothly – Prime brokers view the total amount in depositories as investable for even its own trading purposes, depositories are left with all liability – If a prime broker was to fail, depositories have 27 days under current AIFMD requirements to restore the whole amount, even if they had no fault
  • 16. Reporting and Transparency • AIFMD requires licensed managers to produce a annual report and holdings report • Valuations for the annual report will be performed either by third parties, or the manager if there is no conflict of interest • Other requirements for reporting involving transparency will assist with previous issues that may have been problematic
  • 17. Reporting and Transparency Overview • Annual Report – Remuneration Disclosures • Disclosures to Investors – Percentage of Assets Subject to Special Arrangements and Managing Liquidity of an AIF – Risk Profile, Risk Management, and Leverage • Reporting to Regulators – Frequency, Content and Format – Substantial Leverage
  • 18. Annual Report • Annual reports consist of: – Investment holdings – Financials – Changes in holdings and value of the fund – Historical performance – Net asset value per share – Fixed and variable remuneration to the manager and employees – Plus details of the carried interest
  • 19. Annual Report • Annual reports should be delivered to regulators within six months of the ending fiscal year, and available to investors if requested • Other changes in reporting will rely upon the GAAPs used and the disclosures that writers of the AIFMD deem necessary for proper transparency
  • 20. Annual Report • Remuneration Disclosures – Details involving the disclosure of compensation will vary depending upon the size of the AIF – Disclosure of remuneration will not be made public, but will be available through disclosures of an • Annual report • Separate compensation policy • Any other form
  • 21. Annual Report • Remuneration Disclosures – Requirements of the disclosures are listed in AIFMD – The compensation amount that is disclosed will be itemized in given several ways – Those under the private placement regime are still required to produce a remuneration disclosure
  • 22. Disclosures to Investors Annual reports to investors are a required minimum of AIFs • Percentage of Assets Subject to Special Arrangements and Managing Liquidity of an AIF – Disclosures of redemption rights on special arrangements should be made available to investors along with details of how the special arrangements are set up
  • 23. Disclosures to Investors • Percentage of Assets Subject to Special Arrangements and Managing Liquidity of an AIF – Notifications should be delivered to investors when changes to liquidity or the risk management of liquidity are made • Risk Profile, Risk Management, and Leverage – Details involving risk management must be transparent prior to investments being made
  • 24. Disclosures to Investors • Risk Profile, Risk Management, and Leverage – Risk profile should be made available in offering documents and annual reports – If a risk profile is compromised, investors should be notified immediately to develop a solution – Changes made to leverage caps and collateral should be informed to investors – All levels of leverage that are used or may be used should be disclosed to investors
  • 25. Reporting to Regulators • Reporting requirements found in AIFMD were developed to control the flow of risk in AIFs – These requirements are upon all EU AIFMs who desire to market their AIFs within the EU • Frequency, Content and Format – AIFs who manage between 100 million and 1 billion Euros must disclose reports semiannually, while AIFs that manage over 1 billion Euros must disclose reports quarterly • There is a 30 day deadline for both, but is extended to 45 days for fund of funds
  • 26. Reporting to Regulators • Frequency, Content and Format – Special AIFs, like private equity funds that are unlevered must only report on an annual basis with the same deadlines arranged – AIFMs have many details to include with the reports and have additional requirements if using leverage or non-listed companies in their strategies – AIFMs who manage more than one AIF must list all in a single report, as well as each AIF individually
  • 27. Reporting to Regulators • Frequency, Content and Format – The report that is filed consists of over 41 questions and has many details • Substantial Leverage – Regulators plan on limiting leverage that is considered substantial • Substantial leverage is considered three times the NAV – Disclosures on AIFs that manage substantial levels of leverage have an extraneous amount of details to report
  • 28. Reporting to Regulators • Substantial Leverage – Authorities are responsible for amounts of leverage AIFs use, and can limit the amount of leverage an individual may use if it can endanger a financial systems status – AIFMs must notify authorities when changes to the infrastructure involving leverage is made, and inform regulators on how the change aligns with policies that have been made
  • 29. Regulations on Remuneration Overview • Remuneration on Delegators • Remuneration Committee • Timing and Intertwining of Remuneration Provisions
  • 30. Remuneration on Delegators • AIFMD encompasses delegators beneath the AIFM who were associated with responsibilities of assisting risk and portfolio management • AIFMs must assess whether the delegator(s) are accountable to the compensation subtext under the AIFMD, or if they will demand a contractual agreement that excludes them from submitting information relating to their remuneration
  • 31. Remuneration Committee • AIFs are required to develop a Remuneration Committee (RemCo) if it meets requirements of: – Specific size – Organization – Nature of operations • AIFs consisting of 1.25 billion Euros or less in assets under management, and employing 50 or fewer individuals may be exempt from this
  • 32. Remuneration Committee • AIFs may be able to circumvent these compensation provisions completely if: – A RemCo is started – 50% of remuneration is received as shares in the AIF – Risk management involved with compensation is maintained
  • 33. Timing and Intertwining of Remuneration Provisions • AIFMs managing AIFs before the initiation date are allowed one year to comply • Those receiving salary and remuneration before 2014 may need prior evaluation to the compliance date • Managers receiving compensation from domiciles with different directives will be evaluated on a pro rata substance • Materials required of multiple regulators will be adjusted to fit proper provisions
  • 34. Risk Management New policies that are brought on by risk management clauses develop assessments for risk, risk management, and liquidity of investments • Permanent and Segregated Risk Management Divisions • Risk Management Policies • Measuring and Management of Risk and Risk Limits – Setting Risk Limits and Managing Potential Risks • Liquidity • Examining and Reviewing the Risk Management Policy
  • 35. Permanent and Segregated Risk Management Divisions • Segregated risk management independent of the AIFM is now mandatory to reduce risk in AIFs • This is troublesome for the structure when risk management was previously integrated with investment operations • Audits of the segregated risk management team will be performed annually by either a third party or an inside source if there are no conflicts of interest
  • 36. Permanent and Segregated Risk Management Divisions • Employees on the segregated risk management team will be compensated for goals met for managing risk and not performance of the fund
  • 37. Risk Management Policies • The policies involved with risk management are critical to the implementation of risk management in AIFMD • Crucial elements of the policies are: – Distribution of responsibilities in the AIF – Safeguards to segregate risk duties – Constructing a risk profile and monitoring potential risks Ways in which to monitor risk and make checkpoints for it to clear – Set risk limits – Description of the kinds of reports – Frequency of reporting for AIFs and the AIFM
  • 38. Risk Management Policies • More intricate AIFs may bring on Risk Officers to communicate with upper level management
  • 39. Measuring and Management of Risk and Risk Limits • Scenario and stress tests may be performed to monitor potential risks • When placing risk limits, issues to be considered include: – Market – Liquidity – Credit – Operational – Counterparty risks
  • 40. Measuring and Management of Risk and Risk Limits • Risk management provisions may affect the strategy of the fund and influence changes to – Market risk in volatility – Bilateral transactions that raise risks for the counterparty – Operational risks influencing performance – Liquidity of investments – Credit investments
  • 41. Measuring and Management of Risk and Risk Limits • Provisions in place require AIFs and AIFM to – Implement risk management and prevention methods – Perform pre-tests to analyze accuracy of the measures taking place – Perform scenario and stress tests frequently to adjust to fluctuations in the market – Design reliable measures for liquidation when needed
  • 42. Measuring and Management of Risk and Risk Limits • Setting Risk Limits and Managing Potential Risks – Risk limits should be checked on a day-to-day basis by the independent risk management team – AIFMD does not restrict investing decisions, but it does have two steps to be taken beforehand: • Ensure the decisions made do not contradict with risk limits set • Construct a fail safe in case anything were to go terribly wrong so that it can be solved poste haste
  • 43. Liquidity • AIFMs will need to link the liquidity profile and redemption policies to how they structure their strategy, once it has been chosen • If they plan on supplementing less liquid assets into their portfolios, they will need to contemplate – Redemption restrictions – Pre-launch – And other characteristics involved
  • 44. Liquidity • Special tools will be needed to control risk in liquidity • AIFMs be responsible for supervising – Liquidity profiles – Conflicts of interest that may arise with investors – Enlightening potential investors of the redemption restrictions that apply in great detail before they invest – Initiating stress tests to ensure the liquidity profile – Reporting liquidity policies along with fail safes that have been set in place
  • 45. Examining and Reviewing the Risk Management Policy • AIFs must continually supervise its risk management procedures and notify regulators if changes are made • AIFMs should assure that – Compliance is followed – Safeguards are currently inline with risk management functions – Necessary actions are taken when the accurateness of current policies have changed
  • 46. Disclosures of Control over Non-listed Companies • Funds must report in addition to changes in holdings of non-listed companies when they have voting rights that surpass or descend below 10%, 20%, 30%, 50%, or 75% • If an AIFM acquires a company, he has to inform investors of the purchase and proper authorities in the Member State
  • 47. Disclosures of Control over Non-listed Companies • AIFMs must – Inform employees of the acquisition immediately – Furthermore enlighten the board of directors and shareholders of changes to operations of the company and outcomes that would effect employment – and update employees on conditional changes to employment
  • 48. Restrictions on Asset Stripping • AIFs managed in the EU by EU and non-EU AIFMs are prohibited from – Distributing – Reductions in assets – Allowing redemption of shares – And acquiring additional shares through one’s separately managed AIFs during the first two years of ownership under the passport regime • This applies to public and private portfolio companies
  • 49. Restrictions on Asset Stripping • Responsibilities fall on the AIFM and it is illegal for him to perform or instruct these actions upon others, as he is liable for preventing these actions from taking place to the best of his abilities • Exceptions to these restrictions include: – Companies with net turnover of less than EUR 50 million – Balance sheet totals under EUR 43 million
  • 50. Restrictions on Asset Stripping • Exceptions to these restrictions include: – Special purpose real estate funds – SMEs that make portfolio companies with fewer than 250 employees exempt – And portfolio companies whose registered office is located outside of the EU • Dividend payments may be affected by this, but AIFMD did not discuss interest payments on bonds
  • 51. Tax Consequences • AIFMs may be confronted with double taxation that may come with the passport regime • AIFs will primarily be a tax resident of the location in which it is domiciled, but if AIFMs are managing from across borders, it can become complex and rely upon the authorities in the jurisdictions that are being dealt with
  • 52. Tax Consequences • Investors of the AIF and delegates of the AIFM bring even more complexity when AIFs have to monitor multiple jurisdiction tax guidelines and/or maintain tax treaties • A recent change to the taxation of AIFs was brought on through the Value Added Tax (VAT) Directive
  • 53. AIFMs have to adapt • AIFMs are required to attain an AIFMD license when specific criteria is met • Managers are now accountable for – Directing of depository and risk management requirements – Accounting and compliance requirements – Compensation requirements – Prudential capital requirements
  • 54. AIFMs have to adapt • . Managers are only allowed to delegate their portfolio and risk management roles to the proper regulated entities defined by AIFMD • Depository and risk management will add a safety net in managing the portfolios, and accounting and compliance regulations will assist with transparency and minimize deceptive practices
  • 55. AIFMs have to adapt • Compensation requirements will reduce the amount of risk a manager is willing to take • Prudential capital regulations set a minimum amount of capital that must be on hand at all times • Managers who fall under the AIFMD are confronted with special marketing and passport regulations
  • 56. AIFMs have to adapt • Other guidelines include details about – Annual reports Tracking of assets under management – Due diligence – Observing cash flow – Annual audits from disparate third parties Setting limits on leverage
  • 57. AIFMs have to adapt Overview • Impact on Hedge Funds – Risk Management and Compliance – Other Provisions • Impact on Private Equity Funds – Depositories – Risk Management
  • 58. AIFMs have to adapt Overview • Impact on Private Equity Funds – Remuneration – Capital Requirements – Reporting, Control of Non-listed Companies, Delegating of Manager Functions, and Transparency – Anti-asset Stripping Regulations
  • 59. AIFMs have to adapt Overview • Impact on Real Estate Funds – Depositories – Remuneration and Conflicts of Interest – Risk Management and Compliance • Marketing and Passports in the EU – EU Marketing Passports – Private Placement Regimes
  • 60. Impact on Hedge Funds • Risk management and compliance – Numerous larger firms had already employed Chief Risk Officers to their funds in the recent past, and now mid to small size firms are following the trend – Potential investors who inspect AIFs before investing examines where risk level is on the operational pyramid and how intimate the Risk Officers are with the investment teams work
  • 61. Impact on Hedge Funds • Risk management and compliance – Not all firms will require a compliance team but it is well advised to stay accountable – Third party compliance teams can be hired frequently to perform tasks of valuations that would be requisite under AIFMD
  • 62. Impact on Hedge Funds • Other provisions – Depository and reporting requirements will reflect the same standards upon hedge funds – Compensation received by the fund manager will be reported with the annual report in compliance with AIFMD, as a way of discouraging managers from taking excessive risks – Changes to leverage will be executed as well to lessen liabilities
  • 63. Impact on Hedge Funds • Other provisions – Contracts will need to be adapted for the entities associated with the operations of the AIF, and for those contemplating co-domiciliation of an AIF will require “mirror” entities in any dominion outside of the EU
  • 64. Impact on Private Equity Funds • Unless the fund is closed-ended and dissolves before July 16, 2016, private equity funds are included as an AIF under AIFMD • All AIFs are only permitted a single AIFM who manages the fund • Administration and marketing functions are available to AIFMs that are outside the boundaries of AIFMD
  • 65. Impact on Private Equity Funds • AIFs that have multiple EU and non-EU domiciled managers, have the opportunity to select a desired manager and transport the AIF to the managers domicile • Depositories – Because investments involved with private equity are most often illiquid, managers see this as a hassle that wastes time and money – Adjustments to the AIFMD may be changed in the future to adjust for different AIFs and their investment positions
  • 66. Impact on Private Equity Funds • Risk Management – Risk management teams would be hired on to assist with monitoring potential risks involved with investments – The risk management section covered by AIFMD is for the most part, already used by private equity funds through the due diligence process in valuating prospective investments.
  • 67. Impact on Private Equity Funds • Remuneration – Up to 40% of compensation must be received over a spread of 3 to 5 years • Compensation that is in holding for the time being could be placed into the fund temporarily – Lead roles that would be associated with risk involved in remuneration are – The investment manager – Fundraising managers – Investment management team and board members
  • 68. Impact on Private Equity Funds • Capital Requirements – Capital requirements that are set require managers to either hold their own assets aside, in very liquid investments or cash, or to possess adequate insurance
  • 69. Impact on Private Equity Funds • Reporting, Control of Non-listed Companies, Delegating of Manager Functions, and Transparency – The only changes incorporated into reporting that is not usually performed by private equity funds is the separation of portfolio management, remuneration policy, and valuations – Outside valuators would use service providers as third party contributors to access needed information from private equity funds
  • 70. Impact on Private Equity Funds • Reporting, Control of Non-listed Companies, Delegating of Manager Functions, and Transparency – Issues at hand for operations would lean towards asset stripping for future acquisitions, miscommunication regarding objectives for production of the company and the impact on employment – The delegation of manager functions clause is primarily not applicable to private equity funds since the bulk of the work performed is internal
  • 71. Impact on Private Equity Funds • Reporting, Control of Non-listed Companies, Delegating of Manager Functions, and Transparency – Transparency is predominantly not an issue – Private equity funds have been known to keep their investors current with what holdings are within the fund, AIFMD only re-states what has already been done in the past – How the report is manifested is the only significant area of improvement for transparency
  • 72. Impact on Private Equity Funds • Anti-asset Stripping Regulations – Regulations on asset stripping will restrict activities in structuring that was previously performed in most private equity firms – If there were to be an economic crisis equivalent to 2008, the fund would be unable to implement exit strategies for assets enclosed by the regulation
  • 73. Impact on Real Estate Funds • Even though real estate funds, also known as REITs, are a type of mutual funds, they are still incorporated with AIFs after German regulators pushed that they should be embraced under AIFMD • With investors more leery about REITs since the crash in 2008, they have been less popular and the regulations that have been implemented recently do not contribute many positive aspects to these vehicles
  • 74. Impact on Real Estate Funds • Depositories – Depositories are a considerably pricy vehicle for REITs and require clear communication between the two for confirmation of where investments are located and when – Custodians will have to face sizeable liability and may have to regulate which investments are too risky for it to accept
  • 75. Impact on Real Estate Funds • Depositories – Performing annual valuations would be convoluted due to the structuring of operations through multiple entities – Many who are working on interpreting AIFMD are still uncertain of how regulators propose to implement depository, reporting, and numerous other requirements involved with REITs
  • 76. Impact on Real Estate Funds • Remuneration and Conflicts of Interest – Disclosure of compensation in annual reports is common for REITs, but new provisions will need clarification before they can be initiated – Conflicts of interest have also been covered in the past; some when involving investors and clients with various investors under them consider the additions that come with AIFMD inequitable
  • 77. Impact on Real Estate Funds • Risk Management and Compliance – REITs have previously performed risk management in the past without the sanctioned regulations that enforced teams to be implemented, but this can come across as challenging for some – Latest provisions of the compliance implications are considered very arduous compared to the compliance platforms that had formerly been in place
  • 78. Marketing and Passports in the EU • Two exceptions marketing in the EU are the pursuit of retail investors, and investors who introduce the AIF to others • Member states oversee marketing to retail investors, so AIFMs must check with the applicable jurisdiction to see what restrictions are in place
  • 79. Marketing and Passports in the EU • EU Marketing Passports – Special marketing passports will be made accessible to AIFMs who qualify under specific criteria, and allow them to market in the EU – Specific criteria must be met before an AIFM passport may be obtained – Passports will be accessible to all EU AIFMs marketing AIFs domiciled within the EU by July 22 of 2013, non- EU AIFMs marketing EU AIFs or non-EU AIFs and EU AIFMs marketing non-EU AIFs July 22 of 2015
  • 80. Marketing and Passports in the EU • EU Marketing Passports – Applications for AIFMs in Member states will be processed within 20 days of submitting and obtaining the application • Processing entities would then notify all EU domiciles in which the AIFM intends to market his AIF(s) after the AIFM has received notification of its acceptance
  • 81. Marketing and Passports in the EU • Private Placement Regimes – EU AIFMs who market non-EU AIFs, and non-EU AIFMs who market EU and non-EU AIFs in the EU would be allowed to proceed with operations if compliant with the national private placement regimes guidelines – AIFMs must conform to the standards of AIFMD that are installed during 2013, with exceptions to the depository clauses to be eligible
  • 82. Marketing and Passports in the EU • Private Placement Regimes – Compliance and reporting for the transparency of the fund must be functioned through a third party valuator who is not the AIFM – Authorities, which require reporting, are the countries in which the AIFM is marketing his or her AIF – Risk management of the AIF(s) will be co-monitored between/ among the regulators of the domiciles within the EU where they are marketed, the regulators of the non-EU AIFM’s country of residence and/ or residence of the non-EU AIF
  • 83. Marketing and Passports in the EU • Private Placement Regimes – Non-EU AIFMs and AIFs may not reside within domiciles that are in violation of FAFT policies – This national private placement regime would be established in July of 2015 through July of 2018 along with the passport regime, but may very well be removed after 2018 and substituted with the passport regime altogether
  • 84. Impact on Investment Strategies • AIFMD does not specifically outlaw certain investments strategies, the safeguards which have been set with risk management, depositories, disclosure requirements and everything else will assist in AIFMs cherry- picking their investment choices • A due diligence process is also required of current and prospective ventures before managers make investment decisions
  • 85. Conclusion • There are many safeguards that have been set in place for this directive • Risk management, reporting, and depository requirements presented will be inconvenient for many managing AIFs • The benefits of implementing AIFMD can only be known once the time comes for it to be tested