Alternative Investment Management Association Representing the global hedge fund industry
AIMA/S3 study on Basel III impact
AIMA has published a member survey on how the cost and availability of financing is being impacted by Basel III. The survey is short and straightforward and will take you no more than 20 minutes to complete. You will be able to view the results later this year when AIMA and S3 Partners publish a research paper on the findings. Access the survey here.
The survey looks at:
o How prime brokerage and financing relationships have changed over the last two years and the reasons for this, covering both cost and nature of service
o How hedge fund managers expect these relationships to evolve further in the coming years as Basel III rules bite
o How the hedge fund industry understands some of the key concepts that underpin banks’ response to Basel III, from “optimization” to “collateral management”
All questions in this survey are fully optional and it is open to any hedge fund manager to complete regardless of whether you are an AIMA member or S3 Partners client. The survey should be completed by an individual within the firm who is familiar with your prime brokerage and financing relationships. For further information, contact Adam Jacobs.
EU – AIMA response and ESMA reports on the EMIR Review
Last week AIMA submitted a response to the European Commission consultation on the EMIR Review. The response set out AIMA’s central positions on possible changes to the EMIR framework as part of the formal review of EMIR currently being undertaken by the European Commission. Among other things, the response called for: (i) the availability of third-country equivalence under Article 13 of EMIR for transactions involving at least one counterparty ‘subject to the rules of’ an equivalent third-country jurisdiction; (ii) the replacement of dual-sided reporting with a robust single sided mechanism; (iii) the abolition of the frontloading requirement currently contained within Article 4(1)(b)(ii) of EMIR; (iv) the development of a fast-track process for the suspension of the EMIR mandatory clearing obligation; (v) an alternative mechanism for direct access to CCPs rather than as a formal ‘clearing member’; and (vi) the swift removal of issues currently experienced around the definition of an ‘OTC Derivative’ under Article 2(7) of EMIR. In addition to industry feedback relating to its consultation, the European Commission last week received four reports published by ESMA on the functioning of the EMIR framework. Three of the reports, required under Article 85(3) of EMIR, cover: non-financial counterparties; pro-cyclicality; and the segregation and portability for central counterparties (CCPs), respectively. The fourth report responds directly to the European Commission’s EMIR Review and includes recommendations on amending EMIR in relation to: the clearing obligation; the recognition of third country CCPs; and the supervision and enforcement procedures for trade repositories. Of particular interest to AIMA are ESMA’s calls for the Commission to provide for the suspension of the clearing obligation upon particular market conditions, as well as the abolition of frontloading and an entire rethink of the EMIR equivalence and recognition process for CCPs.
The European Commission will now use the consultation responses and the ESMA reports to assist in the compilation of a final report that the Commission will submit to the European Parliament and European Council. If members have any questions or comments, please contact Oliver Robinson or Adam Jacobs.
US - SEC Division of Corporate Finance Interprets “General Solicitation”
The Securities and Exchange Commission’s Division of Corporation Finance has recently updated its interpretations related to the scope of the term “general solicitation” as used in SEC Rule 506 of Regulation D under the Securities Act of 1933. These interpretations confirm and reiterate many previously existing views and include some new flexibility around the communications and activities that could be undertaken without being deemed a general solicitation. The interpretations also provide further guidance on the concept of “pre-existing substantive relationships”. If you have any questions in relation to this, please contact Jennifer Wood.
EU – European Commission responds on Article 13 equivalence
The European Commission has responded to the Joint Trade Associations letter AIMA sent alongside a number of other trade associations on 22 June 2015 positing questions on a number of issues around equivalence under Article 13 of EMIR and Article 33 of MiFID. Jonathan Faull of the European Commission, responding on behalf of Commissioner Hill, has confirmed that the wording of Article 13 of EMIR does require at least one counterparty to a trade to be established in an equivalent third-county in order for the transaction to benefit from equivalence of third country clearing, reporting and risk mitigation rules. The response letter also confirms that the European Commission may move ahead with an equivalence determination under Article 13 on a rule-by-rule basis, rather than requiring a single holistic determination of the equivalence of numerous third-country requirements. If members have any questions, please contact Oliver Robinson or Adam Jacobs.
Luxembourg - FATCA deadline postponed to 31 August 2015
On 31 July the Luxembourg tax authority (‘Administration des contributions directes’) issued a circular granting the exceptional extension of the deadline from 30 June to 31 August 2015 for FATCA reporting in Luxembourg. According to the Intergovernmental Agreement (“IGA”) on FATCA signed between the USA and Luxembourg as well as the Luxembourg regulations implementing the relevant provisions this Agreement, each Luxembourg Reporting Financial Institution will have to file a report to the Luxembourg tax authorities prior to 30 June of each year. This report will have to include each US reportable account and must be done in a specific format defined by the circulars issued by the Luxembourg tax authorities. If you require further details please contact Paul Hale or Enrique Clemente.
Global – IBA seeks stakeholder views on proposed changes on LIBOR administration
ICE Benchmark Administration (IBA) has been in touch with AIMA in relation to its work on the evolution of ICE LIBOR to a transaction-based rate, in line with the recommendations of the FSB. IBA recently released a Second Position Paper for which it is seeking feedback from all stakeholders who may be impacted by changes in calculation methodology for LIBOR. A questionnaire is available on the IBA website, to which the latter will be accepting responses until Friday 16 October 2016. If you have any questions, please contact Andrew Hill.
Global – OECD takes further steps for implementing automatic exchange of information
On 7 August, the OECD released three reports to help jurisdictions and financial institutions implement the global standard for automatic exchange of financial account information. The first publication is a Common Reporting Standard Implementation Handbook (here), which will provide practical guidance to assist government officials and financial institutions in the implementation of CRS, and to help promote the consistent use of optional provisions or identify areas of alignment with FATCA. The Handbook is intended to be updated on a regular basis. The other OECD publications are an updated edition of the report on Offshore Voluntary Disclosure programmes (here) and a Model Protocol to Tax Information Exchange Agreements that provides the basis for jurisdictions wishing to extend the scope of their existing TIEAs to also cover the automatic and/or spontaneous exchange of tax information. If you require further details please contact Paul Hale or Enrique Clemente.
India - Minimum Alternative Tax (MAT) – Shah Committee Report and Castleton appeal
On 24 July, the Shah Committee submitted its report on the MAT, which has not been made public by the Indian Government. AIMA submitted a written representation (here) to the Committee on 22 June, arguing that the MAT provisions should not apply to Foreign Portfolio Investors (FPIs) for years prior to 1 April 2015 (the position from that date has been clarified by legislation). We understand that the report concludes that foreign investors are not liable to MAT for that period. However, the report seems to be silent on the position of foreign companies that are not FPIs or Foreign Institutional Investors (FIIs) because its terms of reference as framed by the Finance Ministry did not mandate the Committee to review this aspect, even though many of the MAT dispute cases concern such foreign companies. Given its relevance, the Indian Supreme Court has decided to adjourn to 29 September 2015 the Castleton case appeal hearing so that the court may consider the Shah Committee report. If you require further details, please contact Paul Hale or Enrique Clemente in London, Heide Blunt in Hong Kong or Merima Arleback in Singapore.
EU - ICMA study on evolution of European repo market
ICMA has approached AIMA regarding a study that it is conducting into the current state and future evolution of the European Repo Market. The study will be largely qualitative and based on interviews with a broad range of market participants, including repo trading desks, buy-side users of the product, voice and electronic intermediaries, infrastructure providers, as well as central banks and DMOs. The resulting report is envisaged to be similar in format to the 2014 ICMA study into the European Corporate Bond markets.
If you would be happy to be interviewed for this project, please contact Andy Hill at ICMA. Interviews can be by phone, and should take between 30 and 45 minutes. Ideally ICMA would like to interview the main person(s) responsible for the firm’s European repo/funding activity. All responses are anonymized and will only be presented in aggregate. All participants will also have the opportunity to review the draft report before it is published.
State Street Corporation
Alternative investments have steadily gained broader appeal among institutional investors, reaching far beyond the domain of U.S. foundations and endowments which constituted the early adopters of these strategies. All signs indicate that this will continue for the foreseeable future.
The rationale behind the success of alternative investments is investor satisfaction. According to the results of a recent study conducted by State Street Corporation in conjunction with the 2005 Global Absolute Return Congress (Global ARC), institutions give alternatives an astounding 100% satisfaction rate in helping them achieve portfolio diversification. The realisation of lower portfolio volatility and increased absolute returns were key factors behind the growing role of alternative investments in institutional investors’ portfolios.
The study was conducted in October 2005. Participants represented global attendees including corporate pension plans (18%), public and government pension plans (42%), and endowments and foundations (40%). According to Global ARC, the responding institutions collectively manage more than $1 trillion total assets in their investment portfolios. Other conference attendees, including asset managers, consultants and service providers, were not eligible to participate.
Increasing hedge fund holdings
Among its key findings, the study confirmed that institutional investors continue to increase their allocation to alternative investment vehicles. Nearly half of institutional investor respondents have 10% or more of their portfolios invested in hedge funds today. This represents an increase over results of State Street’s 2004 study, when just over a third of respondents said hedge funds represented 10% or more of their assets.
Figure 1: Percent of portfolio allocated to hedge funds
For the first time, State Street also questioned respondents about the role of private equity in their portfolios. While fewer than a quarter of respondents had more than 10% of their portfolio invested in private equity, nearly half had allocated up to 5% and almost a third held between 5% and 10% of their portfolio in private equity assets.
Figure 2: Percent of portfolio allocated to private equity
Most respondents indicated that these new allocations to both hedge funds and private equity will be at the expense of existing active and passive equity allocations, as was also found in the 2004 study.
Growing Comfortable With alternatives
The vast majority of respondents (81%) indicated that their investment boards and trustees are more comfortable with hedge funds than they were 12 months ago. These same boards also devote significant energy to alternative investments—more than half reportedly spend in excess of 15% of their time discussing these assets, primarily to evaluate new strategies and review existing managers.
Respondents all said hedge fund investments have met their expectations for portfolio diversification. Well over half also reported they were satisfied with the results of hedge funds in lowering volatility and raising the absolute return of their portfolio.
Figure 3: Hedge fund results vs expectations
Adding alternative managers
Most institutional investors indicated that they plan to add new hedge fund managers to their line-up and two-thirds said they will hire more private equity managers in 2006. Almost half of survey respondents said they currently engage more than 10 direct hedge fund managers, and about as many said they invest with up to three fund of hedge fund managers. Nearly a third said they do not invest in fund of funds. On the private equity side, most said they utilise more than 10 managers.
Figure 4: Number of direct hedge fund managers used
Figure 5: Number of FoF managers used
Figure 6: Number of private equity managers used
When asked to profile the most desirable attributes for a prospective manager, the respondents said managers most likely to be selected would have the following attributes:
• At least $200 million assets under management
• At least a one-year track record
• An independent administrator strikes their fund’s NAV
• They charge fees of 2 and 20
• They are willing to negotiate their ‘terms’
Separating alpha and beta
The results of this study also illustrate institutional investors’ growing appetite for distinguishing their managers’ performance in terms of alpha and beta. The vast majority of respondents said they selectively engage new managers for both alpha and beta, while only 59% said they were able to differentiate between these results.
For those respondents who said they could not separate a given manager’s alpha and beta results, 82% attributed this inability to a lack of tools and resources. Half of investors surveyed also said they do not use alpha porting techniques.
Figure 7: Separating alpha from beta
There is clearly a growing appreciation for distinguishing alpha from beta returns. Consequently, institutional investors are becoming more sophisticated in how they engage, compensate and monitor the performance of their asset managers. These asset managers will continue to be pressed not only to deliver absolute returns, but to substantiate their true alpha contributions.Back to Listing