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AIFM could cost pension funds €25bn a year

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GLOBAL - The Alternative Investment Fund Managers (AIFM) Directive could cost European pension funds €25bn a year through charges and lower investment returns if is implemented in its current form, the Alternative Investment Management Association has claimed.

Rough figures presented by the association, representing the global hedge fund industry, suggested the AIFM Directive in its current form would increase costs to all investors and substantially reduce the range of investments available because a key part of that directive would block access to over 90% of the alternative investments which are currently accessible in Europe.

Although data is only approximate, the AIMA has estimated around €1bn in invested in alternatives - hedge funds, private equity, real estate funds - each year by European investors, but pension fund returns could be reduced by 2.5% a year unless changes are made to the directive as investors could find they are forced to invest in more traditional assets which are accessible.

This reduction in returns would also be in part because the directive contains restrictions on leverage alongside increased compliance costs, which would limit the investment opportunities to fund managers as well as force them to pass on the regulatory costs.

As it stands, non-EU fund managers will have to wait three years before they can register to market their products in the EU, and that would apply to most alternatives managers as the majority of these firms operate as offshore companies.

And all of this comes just as European pension funds have begun to fully embrace alternative investments within their diversified portfolios, said Andrew Baker, chief executive of the AIMA.

European pension funds have been increasing their allocations to alternative over recent years because of the good returns, lower correlations with traditional asset classes and low volatility they provide," said Baker.

"With Europe facing strong demographic pressures as a result of an ageing population, pension will need strong growth and reliable returns over the coming years in order to meet future demand. If they suffer lower returns as a result of the directive, it's not only Europe's pension funds but Europe's pensioners of both today and tomorrow who will suffer," he added.

The main concern is a concession is understood to have been made in the directive to French EU officials, known as the third party market provision, which roughly matches the existing French regulatory regime and requires non-EU fund managers to wait three years before they are granted an EU passport, but only once they have complied with a heavy load of terms and conditions. French investors are not officially given access to such investments unless, for example, they are able to persuade advisers to invest on their behalf through Cayman-based funds. (See earlier IPE story: AIFM could bring less choice, claims law firm)

In blocking access to these fund managers, the European pension fund arena would either have to either accept the higher cost and potentially lower returns on EU-accepted funds, or switch into other asset classes which may also fail to deliver the risk profile and return sought by the investor, say AIMA officials.

Another term of the proposed directive causing some concern is fund managers will be required to use a depository to hold assets. Firms have told the AIMA they believe this would substantially raise costs as there is no need for a depository on alternative investments. Similarly, this would also impose additional costs on fund managers as European banks would be required to hold the assets, and they in turn will have to charge hefty fees for doing so, to help pay for the indemnity cover they will need to look after such assets.

Baker argued that as the directive stands "none of this is good for the competitiveness of the European financial services sector or indeed the economies of Europe as a whole", especially when the apparent benefits of the directive are still uncertain.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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