Blogs
AIFM - Out of the frying pan?
Jamie Murray
17 November 2009
Alternative investment fund managers must have thought the battle was won. Recent submissions from various established authorities were on record dismissing much of the draft “Alternative Investment Fund Managers Directive” that was going to decimate the industry. Unsurprisingly, the view was that it is very poorly structured and needs a complete redraft. The recent Swedish proposal redrafting the Directive shows much has been taken on board by the relevant authorities. This success has come about through patient lobbying by AIMA and others at the EU level, and much has been achieved. Cue a return to the good old days – hedge funds to continue investing as they had always done and earning the same high fees as before? Er...maybe not.
The proposed changes so far show that the battle on the established fronts of use of leverage and fund distribution is going well. The surprise is the opening of a new front on hedge fund pay arrangements. This was in the annexe to the new Swedish proposal where seemingly a simple “cut and paste” of draft regulations on bankers’ pay has been applied. As we have seen in the UK, with the emotive debate on bankers’ pay as well as MP’s expenses, the alternative investment industry needs to tread very carefully. Some of the media revels in disclosing the multi-million packages of hedge fund and private equity managers. If the Directive goes through in its new form, virtually all pay details for EU based funds will have to be disclosed. A huge backlash against the industry may result.
Dealing with public reactions to high pay is not easy to do
What is most concerning with this new tack is a potential strategy by proponents of the Directive releasing publically available information on compensation arrangements now. We have seen how quickly the media and the public are incensed by high pay and bonuses.
To paraphrase Spiderman “my PR senses are tingling”. The alternative investment industry needs to be wary of a trap. If the public becomes enraged about hedge fund compensation, much of the good work done so far could be rolled back. Dealing with public reaction to high pay is not easy to do, as Lloyd Blankfein at Goldman Sachs found when he had to row back from his comment about bankers “doing God’s work”. I can foresee a scenario where coverage of the “huge bonuses” paid to hedge fund employees drives EU MPs to ratify a Directive much closer to the original draft than seems to be the case now. The consequences would be tragic. An industry which provides investment flair, liquidity and a genuine alternative to traditional asset management strategies would be driven offshore and away from regulation.
How the industry deals with this new front will be critical. An arrogant response with threats to move offshore will roll back the success of the current lobbying. As before, transparent debate, a degree of humility and patient persistence are more likely to prevail.
