EU rules are discouraging non-European managers of hedge funds and other alternative assets from selling their wares to the EU - denying investors access to best-of-breed talent, a report says.

Managers of alternative funds located outside Europe could avoid selling their wares to EU-based clients because of regulatory hurdles, denying citizens in the bloc access to talent when they need returns in a low-rate environment, analytics firm Cerulli Associates has warned.
 
Signed into force in July 2011, the Alternative Investment Fund Managers Directive, which tightens oversight of alternative investments, such as through more disclosure and requirements about custody, is designed, its framers say, to reduce risks to markets. The legislation was called for in the wake of the 2008 financial crash, although industry figures say hedge funds and private equity funds did not play much of a role in the saga and have been unfairly maligned in an indiscriminate assault on financial markets.

One concern has been that alternative funds domiciled in jurisdictions outside the EU, such as Jersey, Guernsey, British Virgin Islands and Cayman Islands, could be discriminated against in EU member states. 

US, Asian and other non-European managers could ignore European investors, David Walker, director of European institutional research at Cerulli, said.

"European allocators could effectively be denied some very talented managers, and returns they badly need in Europe's low-interest rate, low-returns environment," he said.

Cerulli, in a report on European issues, said uncertainties and hurdles connected to the legislation are “proving too troublesome for some managers”. The chief operating officer of one hedge fund told Cerulli that US and Asian managers are ignoring Europe, concentrating greater marketing efforts instead on domestic investors.

"At the crux of the debate is the question of whether the financial rewards outweigh the compliance costs," said Barbara Wall, Europe research director at Cerulli, noting that the cost of becoming AIFMD compliant is estimated at between $300,000 and $1 million.

The directive requires, for example, that alternative fund managers appoint a depositary bank, restrict forms of pay and impose risk oversight terms. 

The report notes – as also previously reported by this publication – that while Guernsey, Jersey and Switzerland have been cleared by the European Securities and Markets Authority to use the AIFMD passport, the US, Hong Kong and Singapore have been told that more analysis is needed before a ruling can be made.

"The delay is cause for concern. A speedy decision is needed - however, we are not hopeful of one," Wall said, adding that the “huge regulatory divergences” between the EU and the US, particularly around the definition of an accredited investor, is an obstacle to equivalence that will not be easily resolved.

Managers without EU passporting rights can use the National Private Placement Regimes (NPPR). However, a lack of uniformity across the EU over how to interpret NPPR creates confusion, Cerulli said. Differences between countries on AIFMD regulatory reporting rules have resulted in some non-EU managers marketing into just a handful of jurisdictions, while others are moving onshore or launching UCITS structures. Also, there is no certainty as to how long NPPR will exist, Cerulli said.