White Paper AIFMD: Hedge

Transcription

1 HEDGE360 Defining Hedge Fund Management White Paper AIFMD: Hedge Funds Take Stock A Hedge360 White Paper

2 Contents 1 Reporting Requirements 2 AIFMD Authorization/Marketing Rules 2 Depositary Assignments 3 Remuneration 3 Getting Ready 4 Hedge360 for AIFMD

3 On July 22 the first phase of the Alternative Investment Fund Managers Directive (AIFMD) takes effect, requiring managers of alternative assets in Europe and elsewhere to step up the pace of operational transparency on behalf of regulators and investors, including more frequent and detailed reporting on investment practices, executive-compensation disclosures, and other critical data. Like its counterpart in the traditional asset-management world, UCITS, the AIFM directive serves as a common supervisory framework whose chief goal is to close existing regulatory gaps at the national level. Nonetheless, AIFMD will mainly be enforced on a regional basis so that if a firm operates different funds in multiple jurisdictions, it will need to abide by the specific set of rules established within each of the participating member countries. While all non-exempt funds will need to make substantive operational adjustments, becoming AIFMD-compliant will be more labor intensive for those operating outside of the EU (in particular non-eu managers marketing non-eu products). As such, AIFMD s impact on a specific fund will largely depend on a number of factors, including the location of the management company (i.e., whether it is based inside or outside the EU); where the fund itself is domiciled; and to whom the fund will be marketed. Given the magnitude of these and other requirements, hedge fund managers will find it particularly advantageous to consider utilizing third-party resources to help them get up to speed as the new law begins to take shape. Reporting Requirements For starters, AIFMD raises the bar from a reporting standpoint: those with managed assets in excess of 500 million will be responsible for issuing detailed information about their organization, activities and roster of portfolio companies to regulators as well as investor clients up to four times annually. AIFs with AUM of will need to issue reports twice a year; all others may report on an annual basis. Under AIFMD, fund managers must abide by a number of new disclosure requirements, including information around P&L, remuneration, special arrangements and the possible impact on management fees/redemption capabilities and other important activities, to be furnished in an annual report issued six months prior to the close of the fiscal year for each marketed fund. The directive also holds participating funds accountable for keeping adequate levels of cash on hand. Internally managed AIFs must maintain 300,000 in capital; for externally managed funds, the minimum drops to 125,000, with an additional 0.02 percent of a fund s total value for those above 250 million, to be capped at 10 million. (The AIFMD provisions are only applicable to funds with AUM in excess of 100 million; for non-leveraged funds with a five-year investor lock-in period, the threshold rises to 500 million.) Like UCITS, AIFMD seeks to create a more level playing field for EU fund managers in part by imposing stricter entry standards for non-domiciled competitors. Under the so-called thirdcountry provision, non-eu managers may continue to access the region through 2018 by securing private-placement status, and may apply for a third-country passport two years into AIFMD. These rules governing non-domiciled funds will need to be ratified by all participating jurisdictions, however, and therefore are subject to change. 1

4 AIFMD: Important Due Dates 7/22/13 Annex IV, other reporting requirements; managerial compensation disclosures 7/22/14 End of grace period for EU-based fund authorization applications Fall 2015 Non-domiciled firms eligible to apply for directive passport Fall 2018 End of 5-year private-placement period for non-eu entities AIFMD chief areas of concern: Marketing (passport versus private placement) Depositaries and the delegation of responsibilities therein Remuneration Transparency and reporting AIFMD Authorization/Marketing Rules Fund managers must demonstrate their ability to comply with the 100-plus articles of the directive through the AIFMD application process (in the EU, this means filing for variation of permission, authorization or registration through the fund s home-country regulatory agency). Domiciled entities have a one-year grace period from the official AIFMD start date in July to make the necessary operational adjustments; funds below the 100 million threshold have a full two years to seek authorization. Non-EU managers must apply for AIFM authorization through each member state of reference (MSR) in which the fund intends to market its services. This includes maintaining a legal representative (such as a service provider) for each MSR responsible for handling communications to and from the local regulator, as well as ensuring that the AIF s marketing and management functions are in compliance with the directive. To avoid potential conflicts, non-eu funds must acknowledge any differences in tax laws or other regulatory discrepancies between the country of origin and the MSR, using a cooperation arrangement established between the two parties. It is important to note that the AIFMD authorization procedure is likely to vary from one region to the next; to date, some jurisdictions (such as the UK) are still in the process of finalizing the details. Depositary Assignments Under AIFMD, an independent depositary will be assigned to each participating AIF for the purpose of handling such integral duties as monitoring of fund flows, safekeeping, verification of ownership, valuation, settlement, and accounting. Short of a full transfer of ownership, all assets maintained within a depositary account (including collateral arrangements) will be considered held in custody. AIFMD requirements are such that only a select number of firms seeking depositary status may make the cut; as a result, accessing depositary services may be difficult for some firms (including those outside of the EU). Additionally, the extra liabilities placed on depositaries is likely to result in an increase in operating costs and, in turn, higher depositary fees for some fund managers. 2 AIFMD: Hedge Funds Take Stock

5 Remuneration Beginning July 22, fund firms will face new requirements regarding the manner in which remuneration is recognized and distributed. AIFMD makes mandatory the hitherto voluntary practice of deferring as much as 60 percent of variable remuneration linked to high-level personnel (such as senior managers or others with integral control capabilities); in some instances (i.e., larger funds), the directive calls for the establishment of a remuneration committee to ensure compliance with the new guidelines. Managers will need to determine whether existing carried-interest arrangements will pass muster under AIFMD, and also ensure that such arrangements are properly disclosed to investors. Getting Ready AIFMD will allow qualified third-party providers to prove their worth to managers in need by offering outsourced services such as advanced reporting, NAV calculation, collateral-monitoring/ clearing and more. Lyn Marcrum, senior analyst for Bostonbased research and advisory firm Aite Group and co-author of the report The Outsourcing Services Landscape for Investment Managers, notes that the regulatory forces under AIFMD and other measures will become a primary driver for investment managers who are considering outsourcing some or part of their operations. For participating funds, AIFMD represents an enormous and intricate set of challenges, remarks Harry Stahl, a partner with SunGard Global Services. In that context, we view AIFMD as an information-management test and there are specific tools that can help organize solutions to this particular set of problems. Accordingly, SunGard has sought to leverage its core product offerings along with its existing consulting capabilities in an effort to develop a regulatory compliance practice for the benefit of hedge fund clients. Like all initiatives, AIFMD compels fund managers to understand which rules will directly impact their business and which tools will help ensure a trouble-free transition period. Rather than relying on one-off solutions, says Stahl, clients would be best served investing in the type of infrastructure that can help manage data across all of the various compliance mandates, including the ability to review and manipulate data in a number of different contexts and reporting requirements. By doing so in advance, companies can avoid the stress and confusion of having to meet multiple filing deadlines on short notice. 3

6 Hedge360 for AIFMD Designed to meet the unique demands of the hedge fund and alternative investment space, SunGard s Hedge360 is a fully integrated, SaaS solution that enhances a fund manager s decision-making capabilities by streamlining operational processes and risk-mitigation mechanisms, in the process helping to boost a fund s transparency and overall institutional credibility. Leveraging the functionality of SunGard s existing applications and resources, Hedge360 covers front-, middleand back-office operations, from comprehensive portfolio accounting and reporting to advanced risk analysis covering potential what-if scenarios, and including an array of valuable add-on components as well. Robust reporting functionality provides managers with a top-down view of all integral data, including the methods used to derive performance calculations and valuations, as well as the ability to modify these calculations in a systematic fashion. Hedge360 easily integrates with external data providers to scales and meet industry demands. Using fully integrated reporting analytics, Hedge360 provides managers with a much broader view of performance and risk across the entire portfolio; pre-configured interfaces allow funds to link directly to prime brokerages and/or fund administrators. Without a doubt, the far-reaching data, reporting, disclosure and capital demands associated with AIFMD could prove quite costly for a number of hedge-fund firms. In its report entitled Preparing for AIFMD s strategic challenges and opportunities, PricewaterhouseCoopers recommends that senior management consider how the directive will affect business and investment strategies and operations: AIFMD s impact is complex, and will differ from one manager to the next for some, AIFMD will open up opportunities; for others it might present formidable challenges. Outsourcing can help companies meet the rigorous demands of these regulatory requirements, addressing areas such as securities pricing, valuation and risk management and providing regulators and investors with accurate and timely data around fund performance. For service providers, the challenge is to deliver advanced solutions in the most efficient and cost-effective manner possible. As noted by Deloitte in last year s report AIFMD for Fund Service Providers, using a single set of tools to manage multi-jurisdictional reporting and transparency functions will help providers boost efficiency while maximizing profitability. AIFMD s disclosure requirements, along with continued investor demand for improved transparency, is incentive enough for providers to fine-tune their range of offerings. By utilizing Hedge360 s specialized solutions and network infrastructure, hedge funds can achieve a higher level of operational transparency required by AIFMD and similar initiatives, in the process providing investment clients with independently calculated portfolio valuation and other vital data. 4 AIFMD: Hedge Funds Take Stock

7

8 About SunGard s Hedge360 SunGard s Hedge360 is an application suite that supports the full investment lifecycle across front, middle and back-office processes for hedge funds and alternative asset management firms. Hedge360 helps improve both investment decision-making and operational efficiency while helping customers manage risk, increase transparency and establish institutional credibility from a single solution. Hedge360 is available on a Software-as-a-Service basis, enabling customers to create a customized solution by selecting required features and functionality as components that include portfolio management, valuation, risk management, compliance, portfolio accounting, reconciliation and client reporting. For more information, visit For more information, please visit: contact us [email protected] Tweet this whitepaper About SunGard SunGard is one of the world s leading software and technology services companies. SunGard serves approximately 25,000 customers in more than 70 countries and has approximately 17,000 employees. SunGard provides software and processing solutions for financial services, education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software. With annual revenue of over $4.0 billion, SunGard is one of the largest privately held IT software and services companies. For more information, please visit DUBAI Tel: HONG KONG Tel: LONDON Tel: NEW YORK Tel: PARIS Tel: SAO PAOLO Tel: SINGAPORE Tel: SYDNEY Tel: SunGard. Trademark Information: SunGard, and the SunGard logo are trademarks or registered trademarks of SunGard Data Systems Inc. or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.