Institutional investors are adding to the pressure to amend a European regulatory proposal that opponents say would sharply cut investor choice in alternative strategies and possibly traditional ones, too, while restricting the ability of U.S.-based alternatives managers to conduct business in the EU.
They warn that the proposal, if not substantially altered, would damage returns for European pension funds and other institutional investors.
Consultants, pension funds and industry groups say the Alternative Investment Fund Management directive will restrict access to non-European markets and some of the best money managers worldwide.
Although originally thought to be aimed at stepping up regulation on hedge fund and private equity managers, experts now say the proposal could extend to long-only strategies as well, if not amended.
“This will affect more than just alternatives managers if not rewritten,” said Robert Howie, a principal and alternatives researcher at Mercer LLC in London.Reduction of choice — whether it be among strategies, geographies or managers — along with added compliance costs will lower returns for European investors, opponents say.
The Alternative Investment Management Association pegged the annual loss for European pension funds at e25 billion ($36 billion). In its estimate, AIMA assumed 20% of the e5 trillion in total European pension assets would be affected by the directive and that the regulations as proposed would take a 250-basis-point bite out of returns on affected investments. The London-based AIMA is a global hedge fund industry group with more than 1,100 members.
“If your choice is restricted, you're going to have a return drag,” Mr. Howie said. “On the cost side, there's an acknowledgement that some of the regulations are going to cost more. Some of it will have to be borne by the industry, but some of it will be passed on to the investor.”
The proposed regulation — written by the European Commission, the executive branch of the European Union — would affect all managers of pooled funds that don't fall under the Undertaking for Collective Investment in Transferable Securities directive, a set of rules affecting European mutual funds that has proven too restrictive for most hedge fund or other alternatives managers (Pensions & Investments, May 18).