Regulation & Investor Sentiment
In the aftermath of the recent financial crisis, financial regulation has become a top priority for countries around the world. Governments in North America and Europe, in particular, have pushed for increased transparency and accountability from firms they believe had a hand in the meltdown.
This quest to eliminate systemic risks in the global financial system recently manifested itself in the U.S. through the passage of President Obama’s financial reform bill. Similarly, in Europe, the pending Directive on Alternative Investment Fund Managers will seek to increase regulation and transparency of managers in the EU. The short-term and long-term consequences of these legislations will be varied, but already investors have begun to feel their impact.
In the U.S., large banking institutions are now limited to holding a maximum of 3 percent of their Tier 1 capital in alternative investment funds. For firms such as Goldman Sachs and Morgan Stanley, this means liquidating billions of dollars from their private equity, real estate, and hedge fund commitments. Over the next ten years, Goldman will have to redeem at least $13 billion from these funds, while Morgan Stanley will need to liquidate more than $2.5 billion.1 Funds themselves will also be affected. Firms with more than $150 million in assets under management are now required to register with the SEC and along with disclosing more information than previously, will be subject to SEC audits.2
In Europe, the European Parliament and the Council of Ministers are currently working to reconcile their two (sometimes conflicting) versions of the Directive on Alternative Investment Fund Managers.3 While the two bodies work to resolve their differing views on disclosure, scope, and the treatment of so called “third country” funds, European investors are left in a state of uncertainty.
In recent conversations with a BHA analyst, a large European insurance firm mentioned that although they’re still evaluating and meeting with new fund managers, actual allocations will be on hold until the effects of the pending legislation are clearer.
Similarly, a pension fund in Switzerland has decided to use this time of uncertainty to take a bird’s-eye view of the alternatives universe and do extensive research on new funds while it waits for the regulatory issues to clear up.
Both of these sweeping pieces of legislation will undoubtedly change the landscape of the alternative investment space. Although investors and fund managers alike are feeling the immediate effects of these policies, both can only speculate as to the true long-term impacts they will have.
1 FINalternatives, “Goldman, Morgan Stanley Will Liquidate Huge Alts. Portfolios, August 10, 2010, http://www.finalternatives.com/node/13499.
2 FINalternatives, “Obama Signs Financial Regulation Reform Bill,” July 22, 2010, http://www.finalternatives.com/node/13259.
3 Global Financial Market Watch Blog, “The EU’s proposed Alternative Investment Fund Managers Directive, May 26, 2010, http://www.globalfinancialmarketwatch.com/2010/05/articles/europe-uk/the-eus-proposed-alternative-investment-fund-managers-directive/.