It seems an unnatural response, but maybe we should pity the poor hedge fund manager. Walloped by crashing markets, stung by the Madoff scandal and blamed for the financial crisis – the past two years will be a time to forget for the industry.

The events led nimble private investors to turn their backs on hedge funds in their droves and left institutional investors as the main client base.

At GAIM International, the world’s leading hedge fund conference held in Monte Carlo earlier this year, GLG Partners’ co-founder Pierre Lagrange told the 750 delegates: “We have to prove as an industry that we can provide absolute returns again. We have to show that in the next year or two, we can fight back.”

But just as the sector has shown recent signs of recovery, it is forced to come to terms with a proposed
European Union (EU) Commission directive, which could have a profound impact on the way the managers operate.

“We are very worried that the EU is moving towards a crisis in alternative asset management,” says Jarkko Syrilä, director of international relations at the Investment Managers Association.

The Alternative Investment Fund Managers (AIFM) directive is an attempt by the EU Commission to create a cross-boarder regulatory regime for any fund manager who operates outside the Ucits framework. This would cover a wide range of managers, including hedge funds, private equity, investment trusts and other closed-end funds. There are even concerns that pooled pension funds could be included.

The directive is aimed at better risk-monitoring and management, increasing investor and consumer protection, and creating accountability of alternative fund managers.

But many within the alternative fund management community believe the directive is a sign they are being made into a scapegoat for the financial crisis. They also feel the net has been too widely and too clumsily cast.

“Imposing ill-considered rules in haste is counterproductive, whether at European or national level,” says Lord Myners, financial services secretary to the Treasury. “We must not be beguiled by protectionism, hiding as though it were protection. Hedge funds and private equity have not been central to the financial crisis.”

Myners is one of a number of high profile critics of directive, which is almost universally resented by the industry. Fund managers feel they are the victims of a witch hunt by politicians who do not understand how they operate and are creating more problems for the investors they are seeking to protect.

The reaction has been a stern defence of the practices of alternative fund managers and a flat denial that they have had a major influence on the financial crisis.

In response to a claim made by Poul Nyrup Rasmussen, the chief architect of the directive, that 70% of companies in difficulty had had some involvement with private equity, Myners states: “It’s not clear exactly what this might mean. However, I would think it likely that more than 70% have been involved with accountants or lawyers, and 100% with men. Perhaps we should legislate against all these groups, too.”

Myners believes the current regulation of alternative fund managers in the UK and other EU countries had produced a stringent and robust system. He says it was not tarred with the same brush as the US sector, which has suffered greatly from events such as the unravelling of the $60bn Madoff ponzi scheme.

Prominent investors have also come to the defence of the alternative fund management industry. The National Association of Pension Funds added its voice to the debate, saying the directive appears to be based on retail regulation, which is inappropriate for institutional investors.

The industry has also found support from one of the most unlikely of sources: the Church of England commissioners, which include Archbishop of Canterbury Rowan Williams, and Archbishop of York John Sentamu – both vocal critics of certain aspects of financial dealing – along with a host of other charitable foundations, have written to the Lord’s EU select committee outlining their concerns over the directive.

The letter reads: “Maximising the returns on our investment portfolios is an essential part of delivering our foundations’ missions, for the benefit of society. The draft directive, while well- intentioned, threatens this goal.”

Though there is broad support for the directive’s main aims of regulating all EU fund managers – as is currently the case in the UK – and increasing the reporting to regulators, there are a number of aspects of the directive that have caused contention.

Printer friendly version

Email this article to a friend