Implementation of the Alternative Investment Fund Managers Directive will change Europe’s hedge fund landscape. In this sponsored Q&A, Chief executive officer of Amundi Alternative Investments, Laurent Guillet, says the rules will encourage more money to flow to hedge funds.
HEDGE FUNDS REVIEW: Amundi was one of the first to try and position itself for the introduction of the Alternative Investment Fund Managers Directive (AIFMD). Why was that?
Laurent Guillet: First, we were very much involved in alternative investments. Once the financial crisis occurred, our analysis was that part of the problem was a lack of regulation, transparency and security. Therefore, we were happy to participate in moving the world towards more regulation.
Because we are working on the Continent, we have been extremely successful in selling and promoting Ucits products. Our experience of regulation was a very positive one. So at the very start we considered this new regulation as a positive for these alternative products.
HEDGE FUNDS REVIEW: Do you think the directive is going to be a game changer for Europe and for Amundi?
Laurent Guillet: Absolutely. The directive must be implemented by July 22 and there will be strong pressure on the institutions and institutional investors to buy regulated products. Therefore, you will be confronted with a situation where, if you are not regulated, you will be at a disadvantage compared with your competitors. There is a need for having more – more regulation, more transparency, more security. There is a need from the investors themselves to get all of these features into a product.
We are at an interesting point in time. The regulators want to do something to avoid repetition of crisis and at the same time investors are demanding to go back to alternative investment but with maximum protections. It will be interesting to see if this directive will facilitate both.
HEDGE FUNDS REVIEW: Do you think the hedge fund community in Europe is prepared for this directive?
Laurent Guillet: As always, at first, transformation is not welcome. There is always strong resistance and I can understand why. [The directive] means new constraints. But, when you consider the directive, it does not impose too many constraints, after all. It does mean adaptation – changing the model – so there has been some resistance. But it is also an opportunity to meet new requirements that are coming not only from politicians, but also from investors.
HEDGE FUNDS REVIEW: Did Amundi have to change much to come into line with the directive?
Laurent Guillet: Yes, we did a lot of things. First, all our funds were domiciled – as with anybody else in the industry – offshore. We had two platforms of managed accounts. One was based in Bermuda, and the other one in the Cayman Islands. We decided, just after the crisis, to migrate the two platforms to Ireland, which we merged and regrouped into one platform. Our funds of funds are also now in Ireland, with some in Luxemburg. Now everything is onshore.
HEDGE FUNDS REVIEW: With 100% of your funds onshore, does that pose any challenges?
Laurent Guillet: It does not, because AIFMD does not impose any constraints. We are not under obligation to comply with any constraints so far. The main change is for our funds, where we have an obligation to introduce a custodian. That benefits the investors because they have another layer of security – people watching where the assets are. This is good.
The other obligation is that you need the approval of the regulator, for example, the Central Bank of Ireland, for the manager. That is additional security for investors because, beyond our own due diligence, the regulator, which is totally neutral and independent, will also approve (or not) the manager, looking at his reputation, the management company’s reputation, activity, and so on.
HEDGE FUNDS REVIEW: Many hedge funds, particularly European based ones, have been disappointed with the lack of funds flowing from institutional investors. Do you think the AIFMD is going to change that? Do you see appetite from institutional investors for hedge funds?
Laurent Guillet: Yes indeed. If you go back to the beginning of the crisis, you can distinguish two areas. US institutional investors have lived through the crisis relatively well. They have been faithful to hedge fund investments and are still big investors in hedge funds and alternatives.
In Europe it is totally different. People have been extremely frightened and hurt by the crisis. They think situations such as Madoff, or the imposition of gates, or the liquidation of hedge funds have been extremely badly handled. Therefore, they have withdrawn totally from alternative investments. The AIFMD could be a way to reassure them and encourage them to come back to alternative investments.
HEDGE FUNDS REVIEW: Amundi runs a managed account platform (MAP). Do you think a MAP is a good way to tempt institutional investors back into hedge funds?
Laurent Guillet: It is a good way, but it is not the only way. What we will offer for European, Asian and Latin American investors is something similar to the Ucits model. Investors from Asia are investing into Ucits, as are those from Latin America. What Europe wants to do is to create another brand name [like Ucits] to secure investors. That is one motivation of the directive.
Although a platform is a way to secure investors, it can still be offshore. There are industry MAPs that are still offshore and, despite the fact that they are offshore, they can still be secure. However, as an investor, if you want to be totally secure, you can add the protection provided by a platform under the AIFMD. That will give you two layers of protection. Investors can still be in a commingled onshore fund without having to go onto a MAP, or they can opt for the total security that comes with a MAP that is also AIFMD-compliant.
HEDGE FUNDS REVIEW: Many investors have been complaining about fees. Do you think doubling the protection level comes with a cost?
Laurent Guillet: You are perfectly right to ask that question because that is the core of the question of investors – what they have to consider if they decide to go down that route.
That platform can also be seen as a buying platform. To that extent the platform has enough size and volume to negotiate cuts in the management and performance fees. The idea is to absorb part of the hedge fund costs through the platform in order to make it more acceptable from the investor’s point of view.
HEDGE FUNDS REVIEW: Are MAPs going to be the preferred route for European-based investors, or do you think they will gradually move into direct allocation to hedge funds?
Laurent Guillet: That is one of the lessons we can draw from the crisis. The fund of hedge funds (FoHFs) business model has been called into question. There were two main criticisms. First, an absence of due diligence as demonstrated in the Madoff case. Even the most known fund of hedge FoHF houses were trapped – but not Amundi.
The second negative lesson was that FoHFs and hedge funds were not supposed to be correlated with the other assets. At the end of the day, everything went down, assets were frozen, gated, and so on. Therefore people took a step back from what FoHFs could bring in terms of value to the investors. The temptation just after the crisis was to go direct to single funds. The fact that the AIFMD is going to provide extra layers of protection could reinforce this trend.
That is one of the problems that FoHF professionals will have. But people will have to think in terms of portfolio, construction and the combination of various strategies together with hedge funds. They will discover that it takes resources, time, means and skill to construct a hedge fund portfolio. So they will go back to FoHFs.
HEDGE FUNDS REVIEW: The hedge fund industry in Europe is centred in London. Do you find being French and based in Paris is a disadvantage or an advantage?
Laurent Guillet: Typically, when it comes to alternative investments, it does not really matter where you are located. For example, all the funds prior to the crisis were located offshore. People did not care about that until the crisis happened.
What matters is who your trading manager is and whether you are regulated or not.
Most important is where your investors are and the best way you can sell to them. Apart from that, you can be located anywhere in the world. We are working with trading managers who are based in Hong Kong and Australia, although most of them are in New York, a lot in London and a few in Paris. But, who cares? At the end of the day, our platform is in Ireland and, hopefully, with the AIFMD, we will be able to benefit from the European passport, the same way as for Ucits. and be able to market products all over Europe without restriction.
HEDGE FUNDS REVIEW: You have a good overview of the industry globally and within Europe. How do you see hedge funds developing over the next 12 to 18 months?
Laurent Guillet: There are challenges and opportunities. The challenge first of all is performance. We have to start with that because that is what people want from us, and what they expect from the alternative industry is performance. What people want is return.
By this I mean hedge funds with the capacity to deliver, on a regular basis, performance of around 6% or 7% net of fees, with volatility of around 5% and the absence of correlation – a real absence of correlation.
If you consider 2011 or 2012, performance was not good enough. People have a lot of expectations in that direction. That is the first challenge for the industry.
Another is that people are waiting to see if the AIFMD will create the environment they need to find a real alternative. That is what we are talking about: alternatives to more traditional assets, such as bonds and equities. If alternatives can deliver, there will be huge opportunities because the market conditions are pushing a lot of big institutions into alternative investment solutions.
HEDGE FUNDS REVIEW: Do you believe regulation, particularly in Europe, could depress performance?
Laurent Guillet: No. If you take global view, what are the real constraints imposed by the directive? Having a custodian? For instance in our case, we are based in Ireland and our custodian is Bank of New York Mellon, a very good custodian, with a good rating, and that is something that is going to reassure investors. It is one of the biggest custodians in the world, if not the biggest.
Then the managers that we have selected will be validated by the Central Bank of Ireland through our managed account platform, even if it is a US manager. There is no constraint if we are dealing with acceptable and reputable managers.
We have to ask the trading manager to produce a report on a quarterly basis. These reports are sent to the regulator. Apart from that, there are no other constraints.
When it comes to investments, there are no diversification ratios, there are no liquidity constraints, nothing. You have a regulated instrument that gives you a passport for selling the product in Europe without many constraints.
HEDGE FUNDS REVIEW: Looking at Amundi, how do you want to see the company positioned?
Laurent Guillet: Amundi is a very large animal. It is managing $1 trillion worldwide. That makes us number five in the world as far as institutional money is concerned, and number two in Europe. So Amundi’s managed account platform, together with the FoHF business, is ranked number 15 globally in terms of FoHF, and number six in terms of MAPs.
Where do we want to go? We want to grow bigger because, compared to the parent company, we have a lot still to do. Our territory is going to be Europe and probably more northern Europe than southern Europe for structural reasons – the presence of pension funds and big insurance companies in northern Europe and Asia – because it also corresponds to the strategy of Amundi and to where the money is.
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