AIFMD transparency and reporting requirements: Kryptonite for AIF Managers?

For the supermen and women of the AIF world, the 22nd July AIFMD implementation deadline may be looming large, with new disclosure and annual reporting requirements on their way. New pre-investment disclosures to investors; an annual AIF report; and a report to competent authorities, covering investment strategies amongst other things. A fundamental threat to hedge funds’ USPs?

Caroline Gibbs, Director at Kinetic Partners discussed the changes and their potential impact with LexisNexis’ Duncan Wood.

What changes will come about from the requirements for transparency/annual reports?

The AIFMD introduces a number of new transparency requirements including disclosures to investors, an annual AIF report and a report to competent authorities.

The disclosure to investors requirements are applicable to any AIF manager that manages an EEA AIF or markets an AIF in the EEA. There are requirements to provide disclosures to investors prior to them investing and will include a number of new disclosures as a result of AIFMD. These include information on the valuation procedure, liquidity policy, the depositary and the prime broker. There are also requirements regarding disclosures that need to be made on an ongoing basis.

The annual AIF report must be prepared for any EU AIF managed by the AIF manager as well as any AIF marketed in the EEA. This report is based on the financial year end of the AIF and must be produced within six months of the period end. The report must be sent to the competent authority of both the home state of the AIF manager as well as the home member state of the AIF (if the AIF is an EEA AIF). This report must also be made available to investors if they request it. A number of requirements in relation to content are items which will already be included in the annual report investment managers currently prepare (eg financial statements and reports on activities during the financial year)—however, there are a number of new items which investment managers may not already include, such as remuneration arrangements. There is also a requirement to provide details of any material changes to the information the AIF manager has already been required to disclose to the investors in the AIF.

For any EU AIFs managed by the AIF manager or any AIFs marketed in the EEA, the AIFM must make a report to competent authorities of its home member state. For Non-EEA AIF managers the report must be sent to any member states in which the AIF is marketed and, if managing an EEA AIF, the home member state of the AIF. There is a lot of information to be provided in this report including information on:

  • markets traded
  • investment strategies
  • principal exposures and concentrations
  • breakdowns of types of exposures
  • the risk profile of the AIF
  • liquidity profile
  • borrowing and exposure risk

A report will need to be prepared for each individual AIF managed or marketed and the report has been likened to the US Form PF.

What transparency obligations will they have as regards their investment strategy?

Investment strategy is included in all three of the transparency requirements set out above.

The report to competent authorities requires that hedge funds indicate which strategies best describe the strategy of the AIF and the percentage share in the net asset value for that strategy. The report also goes into a lot of detail on exposures, concentrations and values of types of instrument trade.

The AIFM will need to include quite a bit of detail in the prior disclosures to investors on investment strategy including ranges of assets and techniques used, associated risks of such assets, any investment restrictions, and leverage used.

The annual AIF report does not necessarily include information on the AIF’s investment strategy. However, if there has been a material change during the year to the information that has been disclosed to the investor as part of the initial disclosure requirements then information on the change must be included. This will include any material changes to the investment strategy.

Will this have a damaging effect of the unique selling proposition (USP) of hedge funds?

The detailed information on investment strategies provided in the report to competent authorities will not be public information and will be utilised by competent authorities (and ESMA) to assess the market and identify any risks. Therefore this report is unlikely to have any damaging effect on the USP of hedge funds.

The disclosures to investors are not required to be made public but certain information on investment strategies will need to be made to investors prior to them investing. There is no guidance on the level of detail that should be provided on investment strategies and therefore firms may choose to only include high level information on the investment strategies. The timing of the provision of this information and whether it is eventually made more public will have an impact of whether the new requirements will have a damaging effect on the USP of hedge funds.

The annual AIF report only includes information on investment strategies if there have been material changes. In addition, this only needs to be provided to investors if they request it and to the relevant competent authority. We cannot envisage that the transparency requirement in relation to the annual AIF report will have an effect on the USP of hedge funds.

(This interview was first published as a Legal Analysis News item on LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor. )

Who do you think will be in a position of strength once the changes are in place?

Filed Under: AIFMD

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