Hedge funds: Increased regulation does not diminish funds available in EU
Hedge funds worldwide have been concerned about increased regulation and implementation of the Alternative Investment Fund Managers Directive (AIFMD) in the European Union (EU) in particular. Mounting costs to comply with new rules are a top concern for most managers, according to Preqin’s “Global Hedge Fund Managers Respond to the AIFMD” report published on July 2014.
However, hedge fund managers outside of Europe recognize that there are substantial capital opportunities in the EU. Preqin noted that institutions in Europe contribute about 20% of hedge fund capital. Most investors are private and public pension funds, asset and wealth managers and insurance companies. Preqin highlighted that 83% of European institutional investors seek to invest globally and use managers based outside of the EU.
Not AIFMD compliant managers will rely on reverse solicitation and private placements
Not AIFMD compliant managers do not want to incur additional reporting and compliance costs and will probably not abide by the new EU standards in the near future. These managers, which are mostly based in the U.S. and Asia, will not proactively market in the EU to raise capital. Instead, a significant proportion of these managers (42% in the U.S. and 50% in Asia and the rest of the world) will rely on reverse solicitation. The process involves prospective investors actively seeking out fund managers though referrals, conferences or research tools such as the Preqin network. Most managers will be focusing their reverse solicitation efforts on 2-4 member states. Investors are concentrated in the U.K. and the Netherlands; capital from these countries comprises 72% of hedge fund investments from the EU.
Some other non EU members such as Switzerland will rely more on private placements to attract investors due to their location. Alternatively, Swiss funds may establish an EU AIFM affiliate or use “managed account platforms to gather capital from EU investors”, in Preqin’s view.