* Deadline for compliance with new rules is July 22
* Few licences given out yet amid uncertainty over rules
* Many foreign funds to rely on 'reverse solicitation'
By Simon Jessop and Nishant Kumar
LONDON, July 21 Europe's move to tighten
regulation of the hedge fund industry could give home-grown
funds an edge over foreign rivals, many of which are still
trying to absorb the new rules on attracting investor cash.
The rules, known as the Alternative Investment Fund Managers
Directive (AiFMD), were launched a year ago to create a single
market for hedge funds and help protect investors by requiring
funds to be more transparent and improve their risk management.
A one-year grace period for funds to get a licence to sell
across the region runs out on July 22, but bureaucratic inertia,
a patchy interpretation of the rules by member states and the
costs of complying means few have signed up so far.
European funds appear likely to adopt the rules sooner
because, unlike their foreign counterparts, they have little
"We found that alternative asset managers headquartered
outside Europe are potentially sleepwalking into the unknown
despite the potential impact on their business," said Georg
Reutter, a partner at advisory firm Kepler Partners.
Without a licence, funds will be restricted from selling
freely across Europe and will have shrinking options to tap the
27 percent of the global industry capital that comes from large
investors in the region, data from research firm Preqin showed.
Nearly half of the funds approached in a global survey of
managers running a combined $300 billion by European fund
structuring firm Alceda said they had not yet applied for a
licence and just a third were already compliant.
The rest were in the process of applying or were not
planning to apply.
"You can feel there's a bit of a scramble out there from
managers who aren't prepared for it," said Jeff Holland,
co-founder of Liongate Capital Management, a London-based money
manager that invests in hedge funds.
"We're getting emails from managers saying 'we're taking you
off the marketing list' or 'you need to opt in to remain on the
marketing list'," he said.
Many of those doing the scrambling were U.S. managers, with
smaller managers often the ones with fewer resources to
interpret and understand the implications of the rules, Holland
That creates an opportunity for European managers who are
compliant to tap into the many billions that have flooded into
the hedge fund industry from institutions such as pension funds,
which themselves value safety and transparency.
"Hopefully in 12 months' time we'll know a lot better what
is allowed and where... It's a great opportunity for European
managers as competition will diminish," said Mark Baak at
Dutch-based Privium Fund Management.
More than 4,000 European hedge funds manage a total of $492
billion, data from industry tracker Eurekahedge showed, about a
third of the $1.4 trillion invested in nearly 5,100 North
A study by BNY Mellon suggested the one-off cost to funds of
complying with AiFMD would be around $420,000, while average
ongoing costs would be around $300,000 a year - fixed costs that
would hit smaller fund firms much more than larger ones.
Reutter at Kepler, which co-authored the Alceda survey, said
41 percent of respondents said they had just a "limited
understanding" of AiFMD.
A survey of 150 hedge funds released on Thursday by research
firm Preqin found 59 percent of the managers thought AiFMD would
have a negative impact on the industry.
There are several options left for those without a licence.
If a fund is happy to forego the right to pitch to clients
anywhere, say because they only have UK clients, then all they
need to do is adhere to UK "private placement" rules on
And with three quarters of the region's hedge fund assets
located in the UK, for many smaller managers that could prove
the most cost-effective option.
But that get-out clause only lasts until 2018, when all
countries must ensure a minimum level of compliance in law with
the directive, which includes rules governing disclosure of
positions and fund manager pay.
While European firms and those big global managers with
heavy commitments in Europe will have no choice but to become
AiFMD compliant, many smaller and mid-sized firms are less sure.
In the Alceda/Kepler survey, 4 percent of respondents said
they would market in each country on a separate basis, 8 percent
said they would consider using a third party to access
investors, while 7 percent said they would not market at all
within the European Union.
That caution was evident at a recent hedge fund conference.
"There are non-European managers that don't even hand me
their card because they don't know if it's allowed... There's no
market practice yet of what's possible or not, what's considered
to be marketing or not," said Privium's Baak.
"We need market practice or some court cases or something to
explain what is allowed or not, but no one wants to be the first
For many foreign funds, the answer will lie in a strategy
known as 'reverse solicitation', where you rely essentially on
the investor to come to you.
"If you're a $2-3 billion equity long-short house in
Connecticut, you've probably got about 20 percent of your assets
out of Europe, then you're probably going to say, and this is
what I think a significant proportion of U.S. clients are
thinking, 'I'm going to rely on reverse solicitation only',"
said the head of prime brokerage at a London-based investment
(Editing by Tom Pfeiffer)