Alternative Investment Fund Managers Directive

Absence of rules, lack of transparency, leverage – hedge funds epitomize all the most dubious practices of finance. And yet, far away from the G20 summit spotlights, the compromise proposed by the Swedish Presidency to the Finance Ministers of the European Union on the «Alternative Investment Fund Managers» Directive marks a significant retreat from the original proposal of the Commission. The European Parliament, endowed with co-decision power on these matters, will have to fight the Member States’ temptation to reach a whitewashed agreement. The AIFM Directive, in our opinion, must satisfy three conditions.

The first condition concerns the reduction of the debt level of the funds. No serious regulation of the alternative funds can be achieved without taking into account the issue of leverage. Thanks to a low initial outlay hedge funds can conquer significant positions on certain markets. To lessen their impact on the volatility of prices it is therefore necessary to reduce the leverage at their disposal. Failure to do so would be even more incomprehensible in the light of a similar measure for the banking system adopted by the G20 summit in Pittsburgh.

The second condition requires the black box to be opened. Hedge funds must become more transparent both for regulators and investors. Regulators must be able to assess the systemic risks embodied by these funds. This can be achieved thanks to regular reporting by funds managers on their strategy, on the leverage level and on liquidity management. Investors, on the other hand, need to provide European savers, who thanks to their pension funds are the main source of capital inflow for hedge funds, with guarantees. This implies transparency about the funds performance, guarantees on the nature of the owned assets by way of independent depositories and rules for the remuneration of funds managers consistent with the long term interests of the investors.

The third condition imposes a restriction of the access to the European market by hedge funds registered in tax havens. In the present situation, where almost half of the world hedge funds are registered in the Cayman Islands, prudential tax haven, European rules, no matter how ambitious, could be easily circumvented. The Directive should therefore establish the principle that funds managed from within the European Union should be registered in the Union itself, so as to allow the new European Authority charged with the supervision of markets to control the risks taken and to protect better the savings of European citizens. Such a restriction is compatible with the rules of the WTO, as specified in the GATS annex on finance services.

The AIFM Directive is the first bill on the regulation of financial markets submitted to the new European Parliament elected this year on June 7. While Member States do not seem to be ready to touch the interests of the finance sector, the Parliament must act in response to the expectation of the majority of the European citizens. As said both by Dominique Strauss Kahn and Jean Claude Trichet, the public opinion will not accept that Governments come to the rescue of the finance sector for a second time. Let’s not have to find out about this!