Delayed scheduling in Brussels of the Alternative Investment Fund Directive — by about six months — might be bringing smiles to the faces of the anti-reform lobby. They would not mind at all that the Directive's final clearance, through a European Parliament plenary session, is now estimated for June or July 2010, rather than Christmas this year.
But the smiles broaden with the publication of a damning assessment of the European Commission's proposals that comes with a vitriolic quick impact assessment. This paper, which roasts the EC's wording now on the table, was commissioned from a London-based consultancy by no less than the Parliament's Economic and Monetary Affairs Committee.
One London newspaper describes the report, from Europe Economics, as a "hammer-blow" to the "swingeing new regulations" on hedge funds. It finds, for instance, the EC's analysis of the policy problem to be "vague, sweeping, and inadequate" as a basis for justifying regulation.
The report criticises proposed provisions that restrict professional investors in the EU from investing through non-EU alternatives managers, which it says amounts to "a very significant restriction on EU investor choice".
However, the assessment does support the argument that "there is a strong case for additional regulation (especially if governments cannot make credible promises not to bail out AIFM bondholders in future)".
Parallel with the consultants' evaluation is another, from the Alternative Investment Management Association (AIMA). In a position paper, AIMA welcomes calls for the "registration and authorisation of hedge funds managers globally". However, it continues: "There are a number of areas where the outcome of the Directive's provisions would be detrimental to the EU's standing as an attractive location for investment." AIMA notes that pensions account for a third of institutional investment in hedge funds.
Speaking similarly on the EU's investment potential, UK government minister for businessPeter Mandelson affirms that in designing the Directive: "We have to make sure that we don't cut off important sources of venture capital or do anything that makes it harder to manage venture capital investments within the single market."
Addressing a Bruegel think-tank meeting in Brussels, the former European commissioner for commerce emphasises the "structural problem in European capital markets for growth and risk capital. Even before the credit crunch, US firms could tap venture capital markets worth over $5bn this year. In the EU it was about a tenth of that."
The CFA Institute, which represents investor interests, has made comments based on a survey. This finds that 94% of respondents support the "mandatory requirements consistent with the proposed Directive", according to CFA's report on the survey.
The respondents are also in favour of the premise that "managers of alternative investment funds [should] act with honesty, fairness, and with the best interests of investors in mind". The survey finds that 80% believe that alternative investment fund managers "should be mandated to appoint an independent third party for the valuation of assets".
Commenting on the findings, Charles Cronin, European head of the CFA Institute's centre for financial markets integrity in Europe, tells IPE that the institute does not believe the Directive will be detrimental to the alternatives business, just as the non-alternatives sector operates well under UCITS regulation.
European Council of Ministers spokesperson François Head, reporting progress of the proposed hedge fund Directive, tells IPE that the Council, under its Swedish presidency, has so far prepared an "all encompassing proposal" that it has presented to a meeting of attachés.
The intention is to arrive at a general approach that the presidency can use as a mandate to negotiate with the European Parliament. Already the Council is liaising with parliamentary rapporteurs representing different political parties. A text agreed by both the Council and the Parliament is expected "much later".
As for specific key subjects, Head says the text is "not stable enough at present to be able to identify individual issues". However, he describes the areas at the core of the proposal as third-country, remuneration and supervisory issues.
Achieving a legislative package is taking longer than expected because there is no existing model to follow. Most financial legislation consists of modifications to existing provisions. "We are dealing with fresh text", explains Head.