The European Commission’s draft Alternative Investment Fund Managers Directive (Directive), published on 30 April 2009, has been greeted with criticism from many including the hedge fund industry, the private equity industry and the quoted investment company industry. It has been described as “disappointing”, “protectionism” and “not a proportionate response to any of the identified causes of the current crises” which is not surprising given the rushed nature of its publication, the lack of consultation and the overt political pressure. The Directive seems to conflict with the comments made in the de Larosière Report and the UK’s Turner review. This Directive has been hastily prepared and if implemented in its current form it is quite feasible that the outcome may prove to be unworkable regulations that stifle investment and market access at a time when they are needed most.

Who and what does it cover?
Any legal or natural person whose regular business is to manage one or several Alternative Investment Funds, or AIFs, that is any collective investment undertaking that is not a UCITS), is defined as an Alternative Investment Fund Manager (AIFM). Any AIFM providing management services in the EU with assets under management (this definition is yet to be fully explained) in excess of €100 million will need authorisation from their home member state and will be subject to ongoing requirements. This will include hedge funds, fund of hedge funds, private equity funds, real estate funds, infrastructure funds, quoted funds, long-only funds that are not UCITS funds and even UK non-UCITS retail funds (NURS), notwithstanding that NURS are FSA authorised.

So unless their business is confined solely to managing UCITS funds or funds which are based outside the EU and not marketed in the EU, for whom there is an exemption, every UK fund manager will be affected. The only other major exceptions are divisions of banks, insurance companies or pension funds, and it is unclear whether their exclusion is only for their own account investments.

The reality for asset managers is that this relatively low threshold, despite the Commission’s suggestion that this will cover approximately 30% of hedge fund managers for example, would mean that a very large number may be caught, especially as the threshold covers AIF assets under the management of EU managers in both EU and non-EU domiciled funds and applies across a corporate group. Whilst on the face of it, private equity has managed to swing a concession, as if an AIFM is not using leverage and has a five year lock-in period for its investors, a higher threshold of €500 million will apply, the exclusion of leverage, aggregation and the marketing restrictions may make this concession of limited value.