Wednesday, April 25, 2012

Hedge Funds Have Significantly Outperformed Equities, Bonds and Commodities over the Past 17 Years

Research commissioned by KPMG and AIMA measured performance, volatility and risk from 1994 to 2011

Hedge funds significantly outperformed traditional asset classes such as equities, bonds and commodities over the last 17 years according to a new study by The Centre for Hedge Fund Research at Imperial College in London. The research, commissioned by KPMG, the international audit, tax and advisory firm, and the Alternative Investment Management Association (AIMA), the global hedge fund association, is the most comprehensive of its kind to date.

The report, entitled “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy”, found that, per annum, hedge funds returned 9.07% on average after fees between 1994 and 2011, compared to 7.18% for global stocks, 6.25% for global bonds and 7.27% for global commodities. Moreover, hedge funds achieved these returns with considerably lower risk volatility as measured by Value-at-Risk (VaR) than either stocks or commodities. Their volatility and Value-at-Risk were similar to bonds, an asset class considered the least risky and volatile. The research also demonstrated that hedge funds were significant generators of “alpha”, creating an average of 4.19% per year from 1994-2011.

“This research is powerful proof of hedge funds’ ability to generate stronger returns than equities, bonds and commodities and to do so with lower volatility and risk than equities,” said Andrew Baker, AIMA’s CEO.

Portfolios including hedge funds also outperformed those comprising only equities and bonds, The Centre for Hedge Fund Research concluded. The study showed that such a portfolio outperformed a conventional portfolio that invested 60% in stocks and 40% in bonds. The returns of the portfolio with an allocation to hedge funds also yielded a significantly higher Sharpe ratio (which characterises how well the return of an asset compensates the investor for the risk taken) with lower “tail risk” (the risk of extreme fluctuation).

The Centre for Hedge Fund Research has created a unique aggregate hedge fund and benchmark index database. The database represents a careful aggregation of all the current information from multiple leading sources about hedge fund performance globally. Survivorship bias is not a factor because both active and inactive funds are included.

“The most interesting point to come out of this research is that it disproves common public misconceptions that hedge funds are expensive and don’t deliver. The strong performance statistics, showcased in our study, speak for themselves,” said Rob Mirsky, Head of Hedge Funds at KPMG in the UK.

The new report is the first of a two-part series on the state of the global hedge fund industry and contains a literature review of current academic work on the industry. The report also highlights the positive contributions the hedge funds industry makes to the broader economy. Not only are hedge funds important liquidity providers in the markets they are active in, they also have a role to play in the efficient allocation of capital, portfolio diversification and financial stability.

Part two of the report, which will be released in May, is based on a global survey of hedge fund managers. It will look at leading industry trends such as the impact of the increasing institutionalisation of the industry on hedge fund managers’ operational infrastructure and how the demands of regulatory compliance and transparency to investors are shaping the industry.

Monday, April 16, 2012

DODD-FRANK DRIVES INVESTOR ACCEPTANCE OF HEDGE FUND MODEL

Regulations To Help Managers Raise Capital, Reassure Investors Says Survey Analysis from Hofstra University and EisnerAmper LLP Financial Services Experts

A new report, The Dodd-Frank Bill – a Year and a Half Later: Views from the Hedge Fund Industry has been issued by the Frank G. Zarb School of Business at Hofstra University in conjunction with accounting and advisory firm EisnerAmper LLP. Among the key findings, hedge fund managers reported that Dodd-Frank rules driving increased transparency while increasing investor demand for information have been broadly positive for the industry. Due diligence process, risk management procedures and reporting requirements all have increased investor acceptance of hedge funds, allowing them to become increasingly mainstream investment vehicles for institutional and individual investors.

Large firms, in particular, seemed to welcome the additional scrutiny, with large majorities favoring SEC registration, the European Passport and a majority backing supervision from the Treasury and the Federal Reserve Bank.

“Managers view registration with the SEC as a cost of doing business,” said Nicholas Tsafos, partner in accounting firm EisnerAmper. “It makes investors more comfortable with hedge fund investing.”

More than 40 senior managers from hedge funds and asset management firms were interviewed in depth by phone or via a detailed email survey. The interviews allowed for follow-up questioning to gain clarity and support the conclusions of the survey. Half of the respondents were from funds with assets under management (AUM) that exceeded $1 billion. The responding executives were at companies that covered activities including long-short funds, global-macro, fixed income, commodity, arbitrage, event-driven and sector specific strategies.

Other significant findings include:
• Managers expect their operational cost will rise due to increased costs of the regulations found in the Dodd-Frank bill
• Pending European Union (EU) regulation may limit remuneration (73% of small fund managers agreed, while 50% of large fund managers did)
• Large (63.2%) and small (78.1%) fund managers expect that new provisions would harm U.S. competitiveness
• Very few managers felt that the Federal Stability Oversight Committee (FSOC) would be able to tame systemic risk in the financial system (only 11.1% of large funds and 10.5% of small funds agreed)
• The Report makes several concluding statements regarding the impact of Dodd-Frank including the realization that the ramifications of the proposed reforms are not yet clear eighteen months after passage of the Act, with many of the more than 400 rules not yet finalized. Anoop Rai, a professor at the Zarb School, and one of the principal authors of the Report, said that in fact this was “…reassuring, as these are important rulings and should be made only after thorough discussions and vetting with all the affected parties.”

Tuesday, April 10, 2012

Hedge Funds Take in $6.8 Billion in February, but Returns Still Lag S&P 500.

Ω

Funds of Funds See Inflow Amid Disappointing Returns

Most Hedge Fund Managers Believe Fed will Raise Interest Rates Before 2014

Neutral Outlook on U.S. Stocks Rises Sharply

Bearishness on U.S. Treasuries Doubles


BarclayHedge and TrimTabs Investment Research reported today that hedge funds took in an estimated $6.8 billion in February, reversing a trend that saw more than $21.5 billion flow out of these funds in January 2012 and December 2011, the largest outflows since July 2009.

Hedge fund managers underperformed the S&P 500 by 180 bps in February, returning 2.3% vs. 4.1% for the S&P 500, according to the monthly BarclayHedge/TrimTabs hedge fund flow report. Managers also underperformed the S&P 500 in the first two months of 2012, 5.5% vs. 8.6%.

"Despite February’s inflows, below average performance and net outflows have kept a lid on hedge fund assets near an estimated $1.72 trillion for the past five months,”said Sol Waksman, founder and president of BarclayHedge.

Funds of hedge funds took in $5.7 billion in February, reversing five months of outflows and returning 1.4%. “Funds of funds underperformed hedge funds by 260 bps over the past year,” Waksman said.

“Recent flows into hedge fund strategies seem to be indicating investors think the latest stock market rally has run its course,” said Charles Biderman, founder and CEO of TrimTabs. Equity Long Bias hedge funds saw an outflow of $6.8 billion in February, the most since they shed $12.4 billion in December 2008. Meanwhile, Equity Long-Short strategies saw an inflow of $1.5 billion in February, the most since they took in $1.7 billion in April 2011.

Japan-based hedge funds have seen surging popularity. “These funds generated an inflow of 16.2% assets in the past year, even though they lost 7.8% in the same period,” said Leon Mirochnik, an analyst at TrimTabs. “It seems these investors did not enjoy the added benefit of currency appreciation in the past 12 months, as the yen gained only 0.7% versus the dollar in that time period.”

Meanwhile, the March 2012 TrimTabs/BarclayHedge Survey of Hedge Fund Managers finds that 63% of managers think the Fed will raise rates before 2014, while 37% think the Fed will not budge from its stance. About 67% of managers do not expect the Fed to launch a third round of quantitative easing in 2012.

The survey also finds a strong note of caution on the U.S. stock market among hedge fund managers. Neutral sentiment on the S&P 500 for April climbed more than 11 percentage points to 40.8% in March from 29.5% in February, according to the survey. Bullish sentiment dove to 30.6% in March from 40.0% in February, and Bearish sentiment dipped to 28.6% in March from 30.5% in February.

The survey of 98 hedge fund managers, conducted in the third week of March, also found that bearish sentiment on the 10-year Treasury had more than doubled, spiking to 48.4% in March from 20.8% in February.

Ω

HEDGE FUNDS ADVANCE +0.59% IN MARCH

Ω

Hedge Funds Experience Best First Quarter since 2006

Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index advanced +0.59% in March (+4.59% YTD), while the S&P 500 advanced +3.13% (+12.00% YTD), the Dow Jones Industrial Average increased +2.01% (+8.14% YTD), and the NASDAQ Composite Index climbed +4.20% (+18.67%). Bonds declined, as the Barclays Aggregate Bond Index declined -0.55% (+0.31% YTD) and the Barclays High Yield Credit Bond Index fell -0.14% (+5.33%).

“Hedge funds posted their best first quarter since 2006 but lagged equity markets as managers were conservatively positioned,” commented Charles Gradante, Managing Principal of Hennessee Group. “However, with 77% of stocks currently trading above their 200 day moving average, many managers believe the market may be due for a correction.”

“Hedge funds have performed well given their low net exposures. Stock selection on the long side generally outperformed the market,” said Lee Hennessee, Managing Principal of Hennessee Group. “However, managers did express some frustration on the short side of the portfolio. Many high beta short positions rallied more than the overall market in the first quarter, detracting from performance.”

Equity long/short posted gains in March, as the Hennessee Long/Short Equity Index advanced +0.95% (+4.87% YTD). The equity market rally continued as the euro zone stepped back from the brink of collapse, the U.S. economy continues to improve, and central banks continue to support economic growth. In March, the S&P 500 broke 1,400 and the Dow Jones Industrial Average surpassed 13,000. Financials (+7.31%), technology (+5.03%), consumer discretionary (+4.44%) and healthcare (+4.27%) were the top performing sectors, while energy (-3.4%) was the only sector to experience a loss. Managers are optimistic as the economy continues to improve, but cautious as stocks have had a strong run and appear overbought. Some managers are concerned about profit margins. Declining profit margins could pose a problem for the stock market in a slow-growth environment. Managers are encouraged that correlations have declined and prices are responding to fundamentals. As a result, hedge funds have increased gross exposure, while net exposure has remained relatively stable.

“While markets have been strong and sentiment is bullish, managers have several longer term concerns. Europe is likely in a recession. The finances of Portugal, Spain and Italy are still in terrible shape,” commented Charles Gradante. “China and other emerging markets are seeing economic growth slowing. The U.S. faces political gridlock and uncertainty ahead of the November election. Lastly, rising gas prices threaten consumer spending. The challenge for hedge funds is participating in the upside of the rally without getting caught with too much exposure if the markets have a sharp reversal.”

The Hennessee Arbitrage/Event Driven Index advanced +0.78% (+4.55% YTD) in March. Investor risk tolerance continued to improve during the month as both equities rallied and spreads tightened. Treasuries declined as U.S. fixed income yields rose sharply on improving U.S. economic data and increasing investor risk tolerance. The Barclays High Yield index fell -0.1% (+5.33% YTD) as yields edged fractionally higher over the final two weeks. The Hennessee Distressed Index increased +0.96% in March (+5.60% YTD). Distressed posted gains as corporate credit spreads tightened, liquidity improved and financial equities rallied strongly. The Hennessee Merger Arbitrage Index advanced +0.42% in March (+3.02% YTD). Managers experienced gains as deal spreads tightened, specifically El Paso & Kinder Morgan and Glencore & Viterra deals. Global deal volume in the first quarter was the slowest start to a year since 2003, according to Dealogic. While managers remain optimistic due to huge cash reserves, low interest rates, and the need for growth, CEO lack confidence needed to do deals. The Hennessee Convertible Arbitrage Index returned +1.12% (+4.95% YTD). Convertible valuations were steady in March, in line with other risk assets. New issuance picked up in March as issuers took advantage of higher equity prices, stable credit markets, and low interest rates.

“Gold has experienced a pull back as fears about the European Sovereign debt crisis have receded and the odds of QE3 have diminished due to better economic data,” commented Charles Gradante. “However, many hedge fund managers are still long gold due to low interest rates and the debasement of reserve currencies.”

The Hennessee Global/Macro Index declined-0.02% (+4.57% YTD) in March. International equities fell, as the MSCI EAFE Index declined -0.91% (+9.97% YTD). International hedge fund managers were positive, as the Hennessee International Index advanced +0.55% (+5.47% YTD) in March due to an overweight position in the U.S. Emerging market declined in March with the MSCI Emerging Markets Index falling -3.52% (+13.65%). Hedge fund managers also declined, as the Hennessee Emerging Market Index declined -1.28% (+4.86% YTD). Macro managers experienced losses in March, as the Hennessee Macro Index fell -0.28% (+1.42% YTD). Managers had gains in currency and fixed income exposures, but suffered losses in commodity exposure. The U.S. dollar gained +0.3% against a basket of six currencies on higher U.S. yields. Managers continue to short the euro and the yen. Treasuries declined -1.0%, and managers partially covered 30-year Treasuries as yields increased from 3.08% to 3.35%. Commodities detracted from performance as the S&P GSCI fell -2.1% in March, the most since September. Gold also declined as the safe haven has fallen out of favor, falling -6.5% in March.

Ω

Long/short equity, multi-strategy and relative value funds enjoy their best quarter since Q3 2009

Ω

After experiencing the best start to a year since 2000, hedge funds paused for a breather during March, delivering a marginally negative performance. With the exception of the US, most markets across the globe registered declines and the Eurekahedge Hedge Fund Index dipped 0.14% in March with the MSCI World Index up by 0.39% for the month.

Key highlights for March 2012:

Long/short equity, multi-strategy and relative value funds witnessed their best quarter since 3Q 2009 with gains of 6.1%, 4.93% and 4.29% respectively.

Assets in hedge funds crossed US$1.76 trillion, gaining over US$50 billion during the first three months of 2012.

Long-only absolute return funds saw gains of 11.4% in the first quarter of this year.

Hedge fund managers employing non-conventional strategies have grown their assets to US$63.2 billion, their highest level since August 2008.

Relative value managers reached US$50 billion of capital for the first time on record.

Islamic funds outperformed other alternative vehicles, gaining 0.63% during March 2012.

More than 100 hedge funds have been launched globally as at the end of March this year.

Main Indices

Main Indices March 2012* 2012 Returns 2011 Returns
Eurekahedge Hedge Fund Index 0.14 4.11 -3.87
Eurekahedge Fund of Funds Index -0.45 2.55 -5.63
Eurekahedge (Long-Only) Absolute Return Fund Index
-0.35 11.40 -14.26
Eurekahedge Islamic Fund Index 0.63 5.84 -3.47

Regional Indices

Regional Indices March 2012* 2012 Returns 2011 Returns
Eurekahedge North American Hedge Fund Index 0.46 4.63 -0.62
Eurekahedge European Hedge Fund Index 0.49 5.17 -6.33
Eurekahedge Eastern Europe & Russia Hedge Fund Index -1.19 8.87 -20.07
Eurekahedge Japan Hedge Fund Index 0.47 4.20 -1.54
Eurekahedge Emerging Markets Hedge Fund Index -0.28 6.66 -8.05
Eurekahedge Asia ex-Japan Hedge Fund Index -2.72 5.53 -12.44
Eurekahedge Latin American Hedge Fund Index 0.80 5.51 2.59

March was a month filled with mixed returns across the various regional investment mandates. Early results showed that Latin American hedge funds delivered the best performance this month and the Eurekahedge Latin American Hedge Fund Index gained a notable 0.80% despite most emerging markets witnessing sell-offs during this period – evident in the 3.50% decline in the MSCI Emerging Markets Index. Managers invested in the region had taken cautious positions in the Brazilian market-based risks of overvaluation and currency. Short positions in Brazil were helpful to portfolios and some managers also reported positive returns from long holdings in the broader region.

North American managers witnessed their fourth consecutive month of positive returns with the Eurekahedge North American Hedge Fund Index gaining 0.46%, bringing its year to date return to 4.63%. Overhang from the high risk aversion and volatility seen in 2H 2011 resulted in some careful positioning by North American hedge funds, effectively preventing most managers from capitalising on the strong positive trend in 1Q 2012. The S&P500 gained 12% in the first quarter of 2012, reflecting the best quarterly performance since 1998.


Strategy Indices

Most strategic mandates delivered marginally positive results in March with hedge fund managers investing in fixed income products performing better than the rest. The Eurekahedge Relative Value Hedge Fund Index gained 0.48% while the Eurekahedge Fixed Income Hedge Fund Index was up 0.46% during the month. A number of managers reported gains from long positions in the high yield loans sector as declining fears about the European debt situation led to a strong performance in lower rated bonds.

CTA/managed futures and macro funds delivered the worst performance for March with a decrease of 0.72% and 0.70% respectively. The weak performance of commodities during the month contributed to the declines in these strategies. The DJ UBS Commodity Index dropped 4.14% and the S&P Goldman Sachs Commodity Index lost 2.36% with natural gas prices declining 22% during the month. Oil prices also saw a decline in March amid speculation of the release of strategic reserves and concerns of a lowering demand due to slowdown in China. Some managers also reported losing out due to long positions in gold.

Strategy Indices March 2012* 2012 Returns 2011 Returns
Eurekahedge Arbitrage Hedge Fund Index 0.13 3.71 0.98
Eurekahedge CTA/Managed Futures Hedge Fund Index -0.72 0.45 -2.74
Eurekahedge Distressed Debt Hedge Fund Index 0.25 4.97 -2.53
Eurekahedge Event Driven Hedge Fund Index 0.19 5.43 -4.60
Eurekahedge Fixed Income Hedge Fund Index 0.46 3.75 0.88
Eurekahedge Long/Short Equities Hedge Fund Index 0.05 6.10 -7.02
Eurekahedge Macro Hedge Fund Index -0.70 2.22 -1.27
Eurekahedge Multi-Strategy Hedge Fund Index 0.43 4.93 -2.05
Eurekahedge Relative Value Hedge Fund Index 0.48 4.29 -0.12


Mizuho-Eurekahedge Indices March 2012* 2012 Returns 2011 Returns
Mizuho-Eurekahedge Index - USD -0.89 2.80 -2.08
Mizuho-Eurekahedge TOP 100 Index - USD -0.64 2.37 1.87
Mizuho-Eurekahedge TOP 300 Index - USD -0.82 2.32 0.04

The Dow Jones Credit Suisse Core Hedge Fund Index Closed Down 0.82% in March

Ω

Dow Jones Credit Suisse Hedge Fund Index (“Broad Index”) relatively flat in March


The Dow Jones Credit Suisse Core Hedge Fund Index closed down 0.82% in March as most of the index component strategies reported negative results for March.

The Dow Jones Credit Suisse Core Hedge Fund Index provides daily published index values which seek to enable investors to track the impact of market events on the hedge fund industry. March, February and year-to-date 2012 performances are listed below and are available at www.hedgeindex.com.

Numbers are:
Mar-12
Feb-12
YTD 2012


Dow Jones Credit Suisse Core Hedge Fund Index
-0.82%
1.31%
2.75%
Convertible Arbitrage
0.18%
2.34%
6.09%
Emerging Markets
-0.98%
1.83%
2.64%
Event Driven
-0.02%
1.47%
4.39%
Fixed Income Arbitrage
0.05%
0.43%
1.42%
Global Macro
-0.06%
0.93%
2.84%
Long/Short Equity
-2.54%
2.05%
2.65%
Managed Futures
-2.11%
0.69%
-0.50%


About the Dow Jones Credit Suisse Core Hedge Fund Index

Following the market events of 2008, increased attention has been focused on liquid hedge fund structures, including managed accounts which tend to offer greater liquidity and increased transparency. The Dow Jones Credit Suisse Core Hedge Fund Index is the only hedge fund index to seek to measure the performance of this rapidly growing industry segment by sourcing funds from multiple managed account platforms, an advantage over indices which are built on a single managed account platform that may have a particular sector bias.

The Dow Jones Credit Suisse family of hedge fund indexes also includes:

1. The Dow Jones Credit Suisse Hedge Fund Index, an asset-weighted benchmark that measures hedge fund performance and seeks to provide the most accurate representation of the hedge fund universe.

2. The Dow Jones Credit Suisse AllHedge Index, an investable index comprised of all 10 Dow Jones Credit Suisse AllHedge Strategy Indexes weighted according to the sector weights of the Broad Index.

3. The Dow Jones Credit Suisse Blue Chip Hedge Fund Index, an investable index comprised of 60 of the largest funds across the ten style-based sectors in the Broad Index.

4. The Dow Jones Credit Suisse LEA Hedge Fund Index, an asset-weighted, composite index which provides insight in to three specific regions of the emerging markets hedge fund universe (Latin America, EEMEA (Emerging Europe, Middle East and Africa) and Asia).




Early estimates indicate the Dow Jones Credit Suisse Hedge Fund Index (“Broad Index”) finished relatively flat in March (based on 71% of assets in the index reporting).



Strategy Estimates for March

Broad Benchmark Index
-0.07%
Convertible Arbitrage
0.59%
Dedicated Short Bias
-1.18%
Emerging Markets
-2.28%
Equity Market Neutral
-0.25%
Event Driven
0.68%
Distressed
1.54%
Event Driven Multi-Strategy
0.23%
Risk Arbitrage
0.21%
Fixed Income Arbitrage
0.68%
Global Macro
-0.43%
Long/Short Equity
0.60%
Managed Futures
-3.00%
Multi-Strategy
0.40%

HEDGE FUNDS CONCLUDE STRONG FIRST QUARTER WITH MIXED STRATEGY PERFORMANCE IN MARCH

Ω

Gains across Equity, Event & Arbitrage strategies offset Macro declines in March;
HFRI Fund Weighted Composite concludes best 1Q since 2006


Hedge fund performance was essentially unchanged in March, with the HFRI Fund Weighted Composite Index posting a narrow loss of -0.01 percent (1 bp) for the month, according to data released today by HFR (Hedge Fund Research, Inc.), the global leader in the indexation and analysis of the hedge fund industry. The HFRI Fund Weighted Composite posted a gain of +4.94 percent for 1Q12, the best first quarter since 2006.

Hedge fund gains were broad-based across strategy areas for both March and 1Q. Relative Value Arbitrage posted the strongest strategy area of performance in March, with the HFRI Relative Value Index gaining +0.60 percent for the month and +4.3 percent for 1Q12; fixed income-based relative value has posted recent gains as strong corporate credit markets and effective hedging has offset the impact of rising US yields.

For the full quarter, Equity Hedge posted the strongest gains across strategies, with the HFRI Equity Hedge Index gaining +7.3 percent, the best first quarter performance total for Equity Hedge since 2000; Equity Hedge gained +0.3 percent in March, completing the 3rd consecutive month of gains. Event Driven funds also benefitted from strong equity and credit markets in 1Q, with the HFRI Event Driven Index gaining +4.5 percent for 1Q, concluding the quarter with a gain of +0.2 percent in March; similar to Equity Hedge and Relative Value strategies, Event Driven funds were positive in all three months of 1Q12. Diverging from other strategies, Macro funds posted a decline to end 1Q, with the HFRI Macro Index declining -0.92 percent in March; despite this, Macro posted a gain of +1.2 percent for 1Q12, the weakest area of strategy performance. Macro performance was undermined by mixed performance across commodity exposure and quantitative, systematic managers; the HFRI Macro: Systematic Diversified Index declined -1.96 percent for March and -0.68 for 1Q.

Fund of Hedge Funds posted a gain of +3.4 percent for the 1Q12, adding +0.06 percent in March, while the HFRI Emerging Markets Index gained +7.35 percent for 1Q12, despite a decline of -1.5 percent in March.

“Hedge fund gains from early 2012 were virtually unchanged in March, with overall 1Q performance the best in six years,” stated Kenneth J. Heinz, President of HFR. “While many global equity markets rallied in early 1Q12, volatility has returned to equities and other asset classes in recent weeks, indicating that although the set of risks has shifted in 2012, navigating the nascent global growth environment requires tactical flexibility and positioning for a broad continuum of macroeconomic and fundamental financial market scenarios.”

View latest HFRI Indices Performance


###

Wednesday, April 4, 2012

AIMA hedge fund group has reservations about E.U. rules


New rule could hamper U.S. firms' access to European investors


The Alternative Investment Management Association (AIMA), the global hedge fund trade association, has expressed concern about the European Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD).

The European Commission proposed the new text in response to advice received on implementation of AIFMD by the European Securities and Markets Authority (ESMA). It is seeking to implement AIFMD swiftly through the format of a “Regulation” which enters effect more quickly than a “Directive”, which is transposed into national law and offers member states more flexibility of implementation. The Commission has given EU member states and the European Parliament only two weeks to respond to this new text.

Andrew Baker, AIMA CEO, said: “We are concerned that this draft Regulation appears to significantly and substantially diverge from the ESMA advice in a number of key areas, including third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of assets under management.

“We fully respect the Commission’s right not to follow ESMA advice when producing secondary legislation. However, there should be more transparency and better consultation if the Commission has decided to depart from the advice in such crucial areas for the global asset management industry.”

As a global trade association AIMA is particularly concerned about the international ramifications of the third country provisions. These relate to non-EU jurisdictions (such as the United States, Canada, Hong Kong, Singapore, Japan, Australia and Brazil) and how managers operating in those jurisdictions may access EU investors.

Andrew Baker, AIMA CEO, said: “The proposed third country provisions do not appear to reflect advice the European Commission received from ESMA on implementing AIFMD. The Commission is contemplating a requirement that EU and non-EU regulators sign co-operation agreements which are legally binding on both parties. These would be extremely problematic if not impossible to conclude if the Regulation prescribes that the cooperation agreements ensure that third country regulators enforce EU law in their territories. It could be extremely difficult for many regulators to be able to sign up to that. We urge the Commission to clarify this issue in their final text.

“Without cooperation agreements, asset managers outside the EU will not be able to access investors in the EU except through reverse solicitation. This would close the door to national private placement regimes in the EU, which would have a major impact on asset managers globally. It would also prevent delegation of portfolio management outside of the EU, which would be of great concern for global asset managers.

“ESMA has made it clear in its advice that cooperation agreements are to be signed on a best-efforts basis and are meant to reflect international norms such as the IOSCO Multilateral Memorandum of Understanding. We hope the Commission follows this advice.”

Hedge and Private Equity Fund Advisers Faced March 30 Registration Deadline: April Fool's!

by John M. Stahl, Esq.

The word on Wall Street for months was that the SEC was very serious regarding the March 30, 2012, deadline that required that every private equity and hedge fund advisers who oversaw at least $150 million in assets register with the SEC. Indications that many impacted advisers were banking on the SEC repealing the requirements or extending the deadline suggested that these financial industry professionals were recklessly turning a deaf ear to that message.

A speech by SEC Commissioner Daniel Gallagher at an Investment Adviser Association event the week of March 5 suggested that not heeding the looming deadline might have been justified. Gallagher reported that the SEC's authority included exempting advisers from the new Dodd-Frank related registration requirements based on adequate proof that that exemption would be "necessary or appropriate in the public interest." Gallagher added that that exemption's scope might include excusing private fund advisers from the requirement with the March 30 deadline.

Gallagher stated that some new regulatory requirements could be unduly broad and costly regarding private fund advisers and other financial industry professionals.

Gallagher's remarks seemed contrary to SEC Chairman Mary Schapiro's statement in a June 2011 press release that SEC-adopted rules that implemented the new requirements "will fill a key gap in the regulatory landscape."

Daniel LeGaye, Esq. of the LeGaye Law Firm P.C., whose practice includes legal issues related to compliance requirements, shared his thoughts regarding the reasons for the seeming inconsistencies between Schapiro's press release and Gallagher's speech.

Tinna Hung, vice-president of Product, Marketing and Strategy at ExamFX, reported on how publishers ensure that readers receive accurate information despite apparently dramatic policy changes such as the current apparent about face.

Background
The regulatory gap to which Schapiro referred related to an exemption under the federal Investment Advisers Act that Dodd-Frank eliminated and to which the March 30 deadline applied. The press release expressed the concern regarding that exemption as "some advisers to hedge funds and other private equity funds have remained outside of the [Securities and Exchange] Commission's regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors."

Gallagher's statement indicated that that concern might not have been very significant.

Resolving the Inconsistency
LeGaye commented in a telephone interview that "it's too easy to say they're [Schapiro and Gallagher] inconsistent." He added that registration and disclosure issues were "very complex" and that that complexity did not excuse not studying and resolving concerns regarding the standards under Dodd-Frank.

LeGaye addressed the heart of the matter in saying that "She [Schapiro] is talking more philosophically; he [Gallagher] is talking more statutory." This referred to Schapiro's tough stance regarding both transparency in the financial services industry and anti-fraud provisions in the Investment Advisers Act of 1940 and Gallagher commenting on what the letter of the law did, and did not, require.

More specifically, LeGaye observed that Schapiro referred to registration and disclosure requirements and that Gallagher apparently limited his remarks to SEC registration requirements. This interpretation included pointing out that "it is clear that there are exceptions to registration" and that Gallagher determined that those exceptions provided the basis for the "necessary or appropriate in the public interest" exemption to which he referred.

LeGaye added that regardless of the exemptions from disclosure, the disclosure requirements helped meet the SEC's objective of wanting to know which funds are out there. He noted that those requirements filled gaps that exceptions to registration created.

A general portion of our discussion evoked memories of a common sense principle that members of the financial services industry advocated while Congress debated Dodd-Frank. This group recognized the benefits of doing the right thing before the regulators required doing so.

LeGaye's slant on "do the right thing" coincided with concerns that Gallagher expressed. LeGaye commented that satisfying new regulatory requirements that acts by some industry professionals triggered can be "very hard, very cumbersome for those who did it right."

Study Guide Publisher's Perspective
Hung provided the following statement regarding the broader issue of policy corrections by the SEC and other regulatory agencies.

"With the uncertainty in the latest regulations, we [ExamFX] are concerned that advisers may be delayed in seeking the training needed to be compliant when new regulations are enforced. Being in the regulatory exam preparation business, ExamFX continually tracks regulatory changes and updates to ensure that our curriculum is current and relevant – this is getting increasingly more difficult. Our content development experts regularly attend conferences and keep up with industry resources to stay current, however a consistent position from financial services regulators would provide clarity for ExamFX and the advisers we serve."

John M. Stahl, Esq., is a freelance legal writer who is a graduate of Babson College and Vermont Law School. Topics about which he has written since 1997 include securities regulation, tax law changes, and developments in workers' compensation law. His e-mail address is jstahl87@gmail.com.