Jean-Paul Gauzes, Member of the European Parliament who is leading the legislative push for the Alternative Investment Fund Manager Directive, has confirmed that the EU will again delay the vote on the measure due to disagreement among member states. 
 
Gauze has led the talks with EU member states on efforts to tighten regulation of hedge funds and private equity firms. The proposed regulation will target foreign hedge funds by requiring them to obtain a single license to operate in Europe. 
 

"The continued delay is certainly not helpful to the industry but the wrangling over the AIFM Directive has been going on for so long now that fund managers are learning to live with the uncertainty,” said Ronald Paterson, a partner advising on hedge funds at international law firm Eversheds. “The existence of redomiciliation legislation, such as has just come into effect in Ireland, gives managers the comfort that they can relocate funds from outside the EU to a suitable EU jurisdiction (or vice versa) if necessary once the Directive finally comes in to force."

In the meantime, hedge fund executives say the skirmishing over the AIFM Directive has already done much to shape how the industry operates. Paramount in this respect is the rising tide of UCITS III fund launches by established hedge fund firms since such funds fall outside the purview of the AIFM Directive. 
 
Typical of the pattern is Martin Currie Investment Management. Later this month the firm is to replicate three of its largest Bermuda-based hedge funds, which have about $1 billion invested in European, Japanese and natural resource company equities, in UCITS funds to be domiciled in Luxembourg. US managers, including Paulson & Co., are also establishing UCITS funds to serve European investors.
 
Andy Sowerby, managing director at Martin Currie, said Wednesday that institutional investors first broached the matter of the directive with the firm in 2009. He doesn’t expect the off-shore funds to lose custom but does expect that future allocations from European investors will mainly flow into the UCITS vehicles. 
 
It is expected that many more hedge fund operators in the UK and the US will launch UCITS funds on platforms run by Deutsche Bank, Bank of America/Merrill Lynch, Morgan Stanley and others. This will help to insulate the funds from whatever provisions are eventually enacted in the AIFM Directive. 
 
But the costs incurred with the UCITS wrapper may modestly dampen returns to investors in some strategies such as long/short equity or global macro. A potentially more grave issue for European investors is that some less liquid, but less correlated, strategies in, for example, event driven and distressed investing won’t be viable as UCITS offerings given the wrapper’s mandatory bi-weekly liquidity condition.