French hedge funds give AIFMD a qualified thumbs up

French hedge funds and the securities regulator AMF believe the Alternative Investment Fund Managers Directive (AIFMD) will - more than UCITS fund vehicles - boost investor confidence in hedge funds and pave the way for potentially significant asset growth. But they caution that further steps are required to fully gain back the trust from institutions.

AIFMD is an attempt to establish a common EU approach to the oversight of managers of alternative investment vehicles, such as hedge funds and private equity funds. UCITS stands for Undertakings for Collective Investment in Transferable Securities.

Participants at Opalesque's third France Roundtable, held in April 2012 in Paris and sponsored by Lyxor Asset Management and Eurex, expressed the belief the AIFMD will have a major impact on the hedge fund industry in Europe. Some of the largest funds of funds, like Amundi Alternative Investments, have already shifted their model from offshore to a 100% onshore, European-regulated framework. This includes a re-domiciliation of most wrappers (the funds of hedge funds themselves) as well as their underlying fund structures to onshore jurisdictions. Amundi said the firm is already now fully ready for the arrival of the AIFMD, and explains that this shift was mainly motivated by concerns from their French institutional clients.

Paris-based asset manager Rothschild & Cie Gestion announced the firm will acquire a fund management company shortly as part of the group's new business strategy. After the acquisition of Héritage Asset Management, this would be Rothschild's second deal in 2012. In addition, Rothschild has decided to partner with a managed account provider and will issue a RFP this summer.

Rothschild and Amundi are two examples of European fund of funds groups that are gearing up for a new future through both growth strategies and improving their core investment strategies by adopting dynamic portfolio management processes, proprietary models in turbulence (risk on and off detection), overlay hedges and better liquidity management.

European investors believe that restructuring fees will be a core theme for the next years for hedge funds to regain trust and momentum with the allocator community.

The 2/20 model is under huge pressure: 'Similar to the iceberg concept, on the surface you see the 2/20 model, but what is happening underneath the water is very different,' one commentator said. New fee arrangements include changes in fee levels and fee formula, as well as claw backs and deferrals.

Patrice Bergé-Vincent, head of the Asset Management Regulation Division at French securities regulator AMF, pointed out that over the next years the industry will come to a clearer distinction between UCITS and AIFM.

Bergé-Vincent said that UCITS products will be more directed to retail investors and AIFs will be reserved for the most sophisticated investors. However, he warned that the increased focus and activities of the Financial Stability Board (FSB) around market regulations may soon turn into a new regulatory paradigm that could be a 'new concern for the asset management industry going forward.'