Month: November 2009

The latest addition to the AIFM proposals in the form of Annex II on Remuneration Policy simply serves to highlight how an opportunity to introduce meaningful regulation is once again being lost as a consequence of pandering to political demands.

Fashionable branding, scarcity and the premiums attached to these are a fact of life.  Badges purporting to represent quality can often be just that as ownership, methodology and standards change over time whilst the badge remains the same.  Should you pay for it?  That depends on why you are paying the premium.  Perhaps it is career risk management, or the desire for institutional grade standards, perhaps it is the perception that you cannot afford not to be in a trade that everyone else perceives as being essential to a portfolio.

Remuneration unquestionably needs to be aligned to the interests of those investing their money in an investment structure to achieve the necessary investment objectives.  Should that alignment be a matter for regulation or market forces?   Are regulators really the appropriate people to assess appropriate remuneration or the price of a product that is available in a market in myriad forms with many providers?   The regulators don’t drive the Rolls Royce or enjoy its benefits – their opinion is relevant simply as traffic police and to ensure that the vehicle complies with safety standards to keep other road users and the drivers safe but it is the market that determines the price of the car.  If the vehicle delivers what the investor wants whether it be branding, institutional standards or risk adjusted returns then the investors should be prepared to pay for what is delivered to them and the market should determine the price for it.

What the regulators need to ensure is that the story behind the badge is an honest and transparent representation of what is being purchased and that it meets safety standards and for the investor to then pay what they believe is an appropriate price for that.

Otherwise European regulation may well destroy the very thing it seeks to preserve as managers look towards the Swiss borders.

©Jaitly LLP

Interesting what people can focus on when doing due diligence on funds………. valuations, liquidity, collateral management.  But fund and investor domicile?  Surely thats something for the lawyers to deal with?

Ethical investing has been around for some time and there are inherent difficulties in the practical application of some of the concepts – but hedge funds have generally never really bothered too much about these aspects being wide and free ranging in their quest for “alpha”.  Perhaps the time has come for investment managers to sit up and take a bit more notice.  Where their funds and investors are based will have an impact that is starting to go beyond issues of taxation.

On the 10th of July this year Luxembourg – the home to many a fund vehicle – UCIT and non UCIT – ratified a law – article 3 of which when translated reads:  “All persons, businesses and corporate entities are prohibited from knowingly financing cluster munitions or explosive submunitions”.  Article 4 carries sanctions with 5-10 years detention and fines between €25,000 and €1 million.  Luxembourg is unusual in that Ireland which has similarly ratified the convention in relation to cluster munitions with variations as to how it is interpreted/implemented do not currently appear to have defined sanctions for non compliance in relation to investment activity.  Belgium and Austria have also adopted laws linked to the signing of the Ottowa convention prohibiting investment activity in businesses involved with the production of anti personnel mines and cluster munitions.

Ireland appears to have protected its fund industry by stipulating that the prohibition (which is no more than endeavouring to avoid) applies to investments where public money is directly invested in equity or debt securities issued by a munitions company.  Where it does so the requirement is simply to divest itself of the investment in an orderly manner taking into account any contractual obligations it may have assumed.  So apparently not too much to worry about if there is a breach as the sanctions for offences don’t appear to apply to these Part 4 breaches……!

Why is the Luxembourg law relevant – because the actions of the investment manager could have an impact on the investors and on the collective investment vehicle based out of Luxembourg particularly if someone decides to commence with enforcement of this law.

Whilst it has been common to see hedge funds excluding US taxable investors to avoid tax risks we may now begin to see investors and feeders registered in particular countries being excluded as well in order to avoid some of the issues that may arise unless investment managers are prepared to restrict their investment activities so that they fall within the permitted boundaries.  It is likely to make trade compliance more onerous for managers as well.

©Jaitly LLP