Examining the potential impact of AIFMD
“It is most welcome to have a dedicated regulatory framework for alternative funds than no framework at all,” comments Lionel Paquin (pictured), head of Lyxor Managed Account Platform (MAP), when discussing the potential impact of the AIFM Directive on the alternatives industry.
“Offshore hedge funds have traditionally been viewed as “black box” investments. The directive changes this. It gives institutions the opportunity to invest in offshore complex strategies in an onshore regulated format.”
It is eminently possible that market regulation could prove to be an unexpected fillip for the hedge fund industry and, by extension, leading platform providers like Lyxor. Why? In Paquin’s opinion, European institutions who are not currently invested in offshore alternative funds may view the directive as opening the door to their investing in onshore hedge funds because of the greater transparency and control on offer. This in turn could help managers raise more assets. The bigger managers become, the more likely they are to offer managed account mandates.
“The directive could be a major catalyst for European institutions who were previously conservative about hedge fund investments,” states Paquin. Moreover, unlike the UCITS regulatory framework, which is not compatible with all alternative strategies, the AIFMD framework is focused on the fund manager.
Rather than viewing the directive as a potential threat to managed accounts, Paquin is upbeat and constructive on the opportunities for Lyxor.
“We have effectively set our own quasi-regulatory standards with our MAP for more than 15 years now. We have third party controls in place, independent valuations, independent risk management, so we welcome and understand the reasons for regulation but we don’t view it as a panacea,” says Paquin, who further explains how the directive will benefit managed account providers: “Becoming AIFMD-compliant won’t guarantee that all hedge funds have excellent performance, impeccable reputation and have the right investment process and the right operational organisation. As a MAP provider our value proposition to investors is to create a consistent investable universe based on managers we ourselves have selected.
“Choosing the right managers is key and that requirement won’t vanish with AIFMD,” asserts Paquin. “We offer homogeneous reporting, a homogeneous trade cycle and many services associated with that that are necessary to investors.”
Mandatory state-of-the-art independent risk management and valuation are core features of the managed account business and key requirements in protecting investors against asset misappropriation, asset mispricing and strategy misrepresentation – risks that will remain in offshore funds post-AIFMD, according to Paquin.
An added opportunity for Lyxor under the directive will be to support non-European hedge fund managers who do not wish to become fully compliant as AIFMs.
“They have three options; either ignore Europe altogether, comply with the directive by establishing their own AIFM which could be expensive and resource-consuming or partner with Lyxor through a win-win deal where we assume the role of the AIFM.
“We can take the responsibility of setting up an AIFMD-compliant vehicle in Europe on behalf of the manager. There will be some rules they will need to comply with as a trading advisor of Lyxor but nothing compared to becoming fully compliant with the AIFMD.”
This, says Paquin, will help strengthen Lyxor’s value proposition to both investors and managers: “We will be able to actively promote ourselves to professional investors and help non-European managers distribute their strategies in Europe.”
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