Several large US hedge funds have threatened to scale back their businesses in Europe. Many other hedge funds have trashed away their plans to foray into the European market due to the new regulation called Alternative Investment Fund Manager (AIFM). The regulation will take effect in July. The regulation is an attempt by European lawmakers to control the hedge fund, real estate fund and private equity industry.
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US Hedge Funds Offices In Europe:
The US hedge funds’ potential exodus has caused worry among European pension funds. That’s primarily because those pension funds have relied on the US alternative funds for years to provide diversity to their portfolios. According to Madison Marriage of the Financial Times, 10% of all the US hedge funds have their offices in Europe.
The AIFM directive will restrict the non-European alternative funds from marketing their products directly to investors. As a result, many large US hedge funds won’t market to European investors any longer. US hedge funds already have presence in the Middle East and Asia, but Europe has now become challenging, said Ian Meade of the US law firm Akin Gump.
Regulation To Hurt US Hedge Funds
The AIFM directive will severely affect the US hedge funds rather than European alternative asset managers. European hedge funds will still be able to market their products directly to investors after getting a “passport” from the regulators. But non-European alternative funds won’t be eligible to apply for this “passport” until 2015 at the earliest.
US hedge funds haven’t seriously considered the impact of the directive as they were preoccupied with the US regulatory changes like the new commodity trading rules and Dodd Frank Act. According to the audit firm KPMG’s Charles Muller, private equity firms and mid-sized hedge funds that have less than 15% of their investors in Europe would be first to quit the region.
Many American hedge funds including Third Point, The Blackstone Group L.P. (NYSE:BX), Baupost Group, Greenlight Capital have a strong presence in Europe. They have also generated hefty profits in Europe. Despite the regulation, yet another European country, Czech Republic wants greater access to the rising hedge fund industry.