GAIM Ops Dublin - The Summary

Here is a summary of GAIM Ops, Dublin, which took place from 8-10 October 2014. COOConnect editor Charles Gubert was in attendance at the conference in the Republic of Ireland.
 

• There is a mixed standard of answers to operational due diligence questionnaires among hedge fund managers. Some managers are only willing to provide four or five pages of answers whereas some can span up to 60 pages. This lack of transparency was not looked kindly upon by investors. While many investors said they would provide constructive feedback, this is generally not what happens in reality.

• Regulatory compliance is causing a headache for smaller managers. The AIFMD’s Annex IV which is a one size fits all document is proving a particular challenge. On Annex IV, managers have been advised to start collecting static data from service providers to populate the document as it is inevitable there will be a mad rush to file the document come the end of October 2014 or January 2015. Service providers report most managers have devoted scant attention to the Annex IV document. This was especially true of US managers.

• US managers keep saying they will use reverse solicitation to circumvent the onerous aspects of AIFMD compliance. US managers say the European institutional market can be ignored, or they can rely on reverse solicitation. The latter is now a joke as many people see reverse solicitation as a risky premise. One lawyer reckoned a European regulator will make an example of a manager found to be breaching the rules at the first opportunity so as to send a message. One anecdote involved a US fund manager claiming to be relying on reverse solicitation yet had hired an EMEA head of business development and marketing.

• There is debate as to what sort of fund structure US managers should launch in  Europe. As it is becoming abundantly obvious, reverse solicitation won’t work, so many managers are adopting one of two approaches. Either they are adopting a “wait and see” approach towards launching a fully compliant AIFM but many want to see how the passport situation plays out. Others report an increase in US managers launching parallel UCITS structures to complement their offshore vehicles.

• The Central Bank of Ireland has said that fund passport schemes in Asia (namely ASEAN and APEC) could pose a threat to the ability of UCITS managers to penetrate the Asian market, whose investors have historically been significant buyers of UCITS. In addition, the mutual recognition scheme between Hong Kong and China whereby fund managers in the former can market to mainland investors could be an exciting opportunity for UCITS and Ireland. This is a point made in a recent paper by HSBC although HSBC is sceptical that the scheme will be extended beyond Singapore and Taiwan. It said while Luxembourg (and Ireland) were contenders for mutual recognition, the whole mutual recognition scheme could just be a ploy to prevent the spread of UCITS in China.

• The future of prime brokerage was discussed. Basel III capital requirements are going to make it substantially harder for prime brokers to lend out assets. As a result financing will become scarce and this could result in hedge funds scaling back on their counterparty relationships. This is likely to face some awkward questioning from investors nervous about counterparty risk. Strategies most likely to suffer are those that require high leverage such as fixed income relative arbitrage, for example. Banks are going to cull relations with hedge funds that are deemed as unprofitable. The entire prime brokerage business is likely therefore to undergo enormous structural overhaul. Smaller managers and those pursuing certain strategies dependent on leverage are likely to suffer disproportionately.

• One panellist said alternative sources of lending would be available to hedge funds. He said firms not regulated under Basel III sitting on cash piles would lend out to hedge funds. He said private equity was one such candidate. Naturally, the prime brokers said they had not seen any viable alternative lenders YET and one warned against entering the space saying building a prime brokerage operation was a technological and costly challenge. 

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