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AIFMD to go global like UCITS

But cost of AIFMD continues to rise and may force managers offshore.

Multifonds, a leader in single-platform, multi-jurisdictional investment fund software, today announces the results of its latest survey on the impact of the Alternative Investment Fund Managers Directive (AIFMD) on the fund industry. The survey, conducted following the release of the AIFMD Level II measures, reveals that 59% of respondents, who collectively manage and administer assets exceeding US$13 trillion and US$28 trillion respectively, believe AIFMD will become an international standard for distributing alternative investment funds (AIFs) globally like the established UCITS brand.

With the 22nd July 2013 implementation deadline fast approaching, there remains widespread industry speculation about the opportunities and challenges AIFMD will bring to fund managers and service providers. Keith Hale, Multifonds’ executive vice president for client and business development, commented: “Convergence between traditional and alternative funds will have a fundamental impact on the way that managers and administrators service the fund industry. AIFMD appears to be a significant new catalyst in accelerating this convergence trend, as demonstrated in our survey results where 83% of respondents agreed that convergence will continue.”

However, the cost of complying with the new regulation is a real concern for fund managers and service providers alike. Since the publication of the Level II text, the costs of implementing AIFMD have increased according to almost three-quarters (74%) of respondents who have either seen a rise in the implementation costs for AIFMD (52%) or still don’t know the extent of their costs (22%). Depositary costs specifically remain a persistent concern, with a significant 47% in the survey still unsure as to the extent of these costs. 41% expect depositary costs to be in the region of 5-25 basis points but increased pressures on liability may cause these to go to even higher levels for fund managers using more exotic strategies.

If the increased costs, such as depositary liabilities, prove to be significant, then this may result in fund managers avoiding being in scope of AIFMD altogether, and cause funds to domicile or co-domicile offshore to service their non-EU investor base. Over three-quarters of survey respondents (77%) believe that EU managers will consider offshore structures to avoid the additional costs of AIFMD for non-EU investors.

Hale continues, “One of the biggest question marks for AIFMD is around cost, and this may prove critical in determining whether AIFMD is ultimately a success. Improving efficiency, in the light of this increased cost burden from both AIFMD and convergence, is the key challenge that administrators must overcome to thrive in today’s industry. This, coupled with the need to provide greater transparency across fund structures, is creating a move by fund administrators to consolidate their operating models, and systems across alternatives and long-only funds. This will put them in a better position to provide timely and consistent data to their fund manager clients, who can then better service and onward report to their investors.”

Should the new inflows into the EU from AIFMD be realized, according to the survey Luxembourg and Ireland will be the biggest winners, with London lagging behind. 89% of respondents placed Luxembourg in their list of top three domiciles likely to be most successful under AIFMD in attracting new business or funds re-domiciling. Ireland came second (selected by 73% of respondents) and the UK came third (selected by 50% of respondents) – a less positive assessment of London’s prospects than often made.

Hale concluded: “Overall, the institutional investors and global inflows will likely outweigh the potential exodus of funds from EU domiciles, although it may take a few iterations of the Directive before it goes global as UCITS III did in the 2000s. Finally, although 83% of our respondents believe they are now ready for AIFMD, or will be come July, there is still much on-going discussion around reporting and cost. In our opinion, that readiness is going to be tested over the coming months and the industry might find it is not as ready as it thinks it is.”