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Winzer on Chinese Economy: “A Bumpy Transformation Process”

Gerhard Winzer, Chief economist at Erste Asset Management, talks about the transformation process in China’s economy; away from growth driven by production and investment, to growth carried by service and consumption. He also explains how this transformation has negatively affected other emerging markets, specifically the commodity-exporting countries and what to expect in terms of economic growth for the rest of the world.

In his assessment about Chinese economy he highlights the decline of the industrial production: “Even though the GDP growth rate in China increased in the second quarter, the trend of investment growth and of the growth of industrial production has been on the decline, and exports are shrinking. This suggests that the transformation process in China is the reason for the weakness of the commodity prices, of industrial production, and of the emerging markets: away from growth driven by production and investment to growth carried by service and consumption. The third dimension of this transformation shows that the process has been a bumpy one: the forces of a market economy are to be strengthened at the expense of a centrally planned economy for the allocation of resources.”

On the stocks markets, he mentions the extensive intervention of Chinese government to avoid major problems in their economy: “The government bailed out the markets with extensive interventions when the Chinese equity markets slumped in the wake of strong gains that were not fundamentally justified (e.g. by earnings development). Similar examples in history suggest that further crashes may be avoided but that governmental interventions cannot produce sustainable gains. The fourth dimension, i.e. the internationalisation of the renminbi, will probably also be a bumpy one. It will still take some time before the Chinese currency becomes fully convertible and it can truly assume a function of value storage for foreign capital. In the meantime the emerging markets will remain in a process of adjustment that could continue to depress the currencies.”

On his assessment of economic growth for the rest of the world, he clarifies: “Global GDP growth has probably only increased marginally in the second quarter after the very weak first quarter. Economic activity has thus remained disappointingly weak on a global scale.

At least the US economy managed to recover from the de facto stagnation in the first quarter. According to the initial estimate for the second quarter, the GDP had grown by an annualised 2.3% relative to the previous month. The core inflation rate (q/q) has accelerated to 1.8%. If the economic reports in the coming months suggest a continued recovery, the US central bank will raise the Fed funds rate this year by a slight degree.

The Eurozone, too, has produced positive economic news. For example, the business climate index increased in July, and the banks have loosened their lending guidelines again in Q2. The Greek crisis has apparently not caused the sentiment to decline. The indicators suggest a continued moderate recovery.

The “rest” of the world, however, is facing a further deterioration of the economy, in particular in the emerging countries where many economic indicators have been sliding. Interestingly, with Brazil and Russia two large commodity-exporting countries are currently stuck in a recession.

The manufacturing sector is generally weak across the world, with industrial production shrinking on a global scale. The real exports and imports of goods, too, are on the decline in most regions. Export prices have been receding drastically on a year-on-year basis. We can observe such developments particularly in the Asian emerging markets. Many commodities, especially oil, steel, and copper as well as the precious metals silver and gold have incurred losses.”

Investing Lessons from Baseball’s Active Managers

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Lecciones del béisbol para gestores activos — Photo: Mauro Sartori . Investing Lessons from Baseball’s Active Managers

As the popularity of passive investing continues to gain momentum, AB has taken a pause to think about a lesson from baseball. The question is: what kind of equity lineup creates a winning team?

Nobody can deny the increasing shift of equity investors toward index strategies. Net flows to passive US equity funds have reached $21.7 billion this year through June, while investors have pulled $83.7 billion out of actively managed portfolios, according to Morningstar. In this environment, active managers are increasingly challenged to prove their worth and justify their fees.

Building a Winning Lineup

Baseball provides an interesting analogy for the active equity manager. “Across all players in Major League Baseball, the batting average this season is .253, as of August 6. Yet even in today’s statistics-driven environment, you won’t find a single team manager who would choose to put together a lineup of nine players who all bat .253—even if it were possible”, explained James T. Tierney, Chief Investment Officer, Concentrated US Growth.

The reason is clear and intuitive. For a baseball team to be successful, it need to have at least a few hitters who are likely to get hits more often than their peers. And to create a really robust lineup, a manager wants a couple of power hitters who pose a more potent threat. “Of course, some hitters will trend toward the average and slumping players will hit well below the pack. That’s why you need a diverse bunch. A team comprised solely of .253 hitters is unlikely to have the energy or the momentum needed to win those crucial games and make the playoffs”, said Tierney.

False Security in Average Performance

So what does this have to do with investing? “When an investor allocates funds exclusively to passive portfolios, it’s like putting together an equity lineup that is uniformly composed of .253 hitters. This lineup might provide a sense of security because returns will always be in synch with the benchmark. But it’s little consolation if the benchmark slumps. A passive equity lineup won’t be able to rely on any higher-octane performers to pull it through challenging periods of lower, or negative, returns”, point out the CIO.

Still, many investors fear getting stuck with a lineup of .200 hitting active managers. AB believes the best strategy to combat that risk is to focus on investing with high conviction managers, who have a strong track record of beating the market, according to a research.

Passive and Active: The Best of Both Worlds

Passive investing has its merits. Investors have legitimate concerns about fees as well as the ability of active managers to deliver consistent outperformance. The appeal of passive is understandable.

Yet AB believes that putting an entire equity allocation in passive vehicles is flawed. It leaves investors exposed to potential concentration risks and bubbles that often infect the broader equity market. And with equity returns likely to be subdued in the coming years, beating the benchmark by even a percentage point or two will be increasingly important for investors seeking to benefit from compounding returns and meet their long-term goals

“There is another way. By combining passive strategies with high-conviction equity portfolios, investors can enjoy the benefits of an index along with the diversity of performance from an active approach, in our view. Baseball managers don’t settle for average performance. Why should you?”, summarized Tierney.

BLI: “In Terms of Financial Investments, There Are No Obvious Alternatives to Equities”

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After rising sharply in the first quarter of 2015, most equity markets fell back slightly later. The surge in bond yields, the prospect of a tighter monetary policy in the United States, and uncertainties over the future of Greece as well as economic growth in China all contributed to investors’ nervousness and increased their aversion to risk. But despite greater volatility, there has been little change in the economic and financial environment, says Guy Wagner, chief investment officer of Banque de Luxembourg, in an analysis published on BLI’s blog Greece and China et cetera: update on our investment strategy.

“In keeping with recent tradition, the International Monetary Fund has just revised its growth forecasts downwards, this time citing the ‘unexpected weakness in North America’. This revision only illustrates the structural brakes hanging over growth and point towards growth significantly below the historic average in the coming months. In this context, there is little prospect of a steady rise in interest rates. Meanwhile, low interest rates will continue to render obsolete the principles that have historically guided asset allocation between equities and bonds.

First of these is the principle that considers equities as risk assets and bonds (at least government bonds) as risk-free (or very low risk). In normal times, an environment like the present, dominated by economic uncertainties, weak growth and contained inflation, would suggest an allocation favouring bonds over equities. Today, however, the situation is such that to obtain any sort of decent yield on bonds, you have to make major concessions on debtor quality. But, making this kind of concession in a world dominated by massive debt and weak growth (which reduces the capacity to service this debt) could prove very dangerous. In fact, it amounts to replacing a risk of volatility by a risk of permanent loss (on the bond markets, you are by definition dealing with leveraged companies). Where long-term investing is concerned, volatility is not the best definition of risk.

So, in terms of financial investments, there are no obvious alternatives to equities, provided they are not valued at ridiculous levels. What about current valuations? The fact is that, depending on the ratio that one uses, it is possible to arrive at the conclusion that equities are cheap, expensive or somewhere in between. Firstly, any valuation method based on current interest rate levels shows that equities are undervalued. Secondly, and generalising somewhat, ratios using current or forecast earnings for the next 12 months show that equity valuations are close to their historic average. And thirdly, according to turnover, equity capital, asset replacement value or normalised profits, equities look expensive. The conclusion of all this could be that the return one might expect from equities in future years will be below the historic average but without there necessarily being a major decline”.

Equity bias but with realistic expectations

In his blog, the expert explains that, in the current conditions, a strategic asset allocation between equities, bonds and cash is bound to favour of place to equities. “This is true even for portfolios whose objective is to generate income rather than capital gains. As Glenn Stevens, Governor of the Reserve Bank of Australia, said recently, the big question is how can an adequate flow of income be generated for the retired community in the future in a world in which long-term nominal returns on low-risk assets are so low? The answer is that there is no miracle solution and you have to be prepared to take more risks to achieve the desired return.

However, this should not be interpreted as an endorsement of passive management. The fact is that, given the historically low level of bond yields, there is little point in making major adjustments between asset classes (increasing/ reducing equities to the detriment/in favour of bonds) unless one were to bet on short-term movements in these asset classes. This type of market timing is always a hazardous exercise, even though it seems to be the main concern of many fund managers (or their clients). The market fluctuations over recent weeks as the Greek situation unfolded are a good illustration of the futility of this approach. Despite daily movements up and down of varying degrees, the market has remained virtually unchanged overall. Changes in the allocation between equities and bonds based on more tangible elements, such as the relative valuation of the two asset classes, are harder to assess while bond yields are so low, unless a particularly excessive valuation or very unfavourable earnings prospects were to suggest a negative return on equities. But that isn’t the case yet”.

Active management combining quality and dividends

And he defends: “Active management within asset classes, especially equities, is therefore all the more vital. While the economic and financial environment remains weak, it is particularly important not to make concessions in terms of the quality of the companies in which one invests. Since no fund manager would admit to buying poor quality companies, we will just focus here on reiterating what makes for a good quality company. We define it as a company with a sustainable competitive advantage which gives it an edge over the competition and allows it to create entry barriers to its markets. This gives companies better control over their destiny and enables them to capitalise on their strengths, thereby creating a virtuous circle. Such companies are characterised by a high return on equity, little debt and low capital intensity. Note too that in the current context, there is a particularly wide gap between their return on equity and cost of financing, theoretically justifying much higher valuation multiples.

A second investment theme, closely linked to quality, is thatof dividends. One of the investment strategies that has produced the best results over the long term consists of buying companies combining a high dividend yield and a low payout ratio. The high dividend yield makes these companies particularly attractive for investors seeking regular income, while the low payout ratio is reassuring with regard to the sustainable nature of the dividend, and even its potential to increase”.

Standard Life Investments’ £18m Confidence in UK Regional Property

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The Standard Life Investments Property Income Trust has purchased a portfolio of three offices, plus a retail warehouse in cities across the UK. The two separate deals represent a total investment of over £18 million, bringing the Trust’s overall portfolio to just over £300 million.

The offices – in York, Milton Keynes and Dartford – have a total value of £13.25m, reflecting an initial yield of 7.4%. All the offices are fully let to prime tenants with strong covenants.

The retail acquisition is a Halfords retail warehouse, part sublet to Maplin, and a car show room in Bradford. The asset was acquired for £5.1 million at a yield of 9.5%. It is located next to the dominant retail warehouse park in Bradford.

Jason Baggaley, Fund Manager of the Standard Life Investments Property Income Trust, commented: “These investments demonstrate our confidence in UK regional property markets where we continue to find high quality assets across sectors. The office acquisitions should provide an attractive return on income plus rental growth, while the retail investment offers an attractive running yield with plenty of asset management potential.”

Benchmarking Study Shows RIA Firms Are Achieving Record Growth and Profitability

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As many independent registered investment advisor (RIA) firms surpass the 20 years-in-business mark, their revenue and profitability have achieved all-time highs according to results from Charles Schwab’s 2015 RIA Benchmarking Study. Nearly half of firms (42%) participating in the Study have doubled their revenue since 2009, and assets under management (AUM) have increased by 75 percent for half of firms in the Study over the same time period, representing a compound annual growth rate (CAGR) of 12.1 percent. Along with AUM growth, profitability – measured as standardized operating margin – has risen 36 percent over the last five years and now stands at 27 percent for the median firm in the Study. Moreover, the gap in profitability has decreased between the most profitable and least profitable firms as the industry continues to mature and more firms adopt best practices and technology-led innovations.

Now in its ninth year, the Study includes responses from more than 1,000 firms collectively managing nearly three-quarters of a trillion dollars in assets. In addition to record revenue and profitability, the data also shows that RIA firms have achieved an effective combination of growth and improved operating margins as they are increasingly institutionalizing operations and making strategic decisions around talent – not only to manage their recent growth, but also to be better positioned to succeed into the next decade and beyond. The results indicate that the sustained, rapid growth trajectory over the past five years has also helped build considerable value in many firms. The benchmarking data indicates firms are not only increasing assets under management through both client acquisition and organic growth but are also enjoying high client and employee retention – attributes of business health and value.

“More than half of the RIA firms in the Study are now embarking on their third decade in business and the data shows that they are doing so from a position of competitive strength,” says Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services. “As RIAs and the industry-at-large continue to mature, firms are learning from each other and sharing best practices to help build scale and fuel growth. The independent model is clearly winning today among high-net-worth investors, and RIAs are also preparing themselves to capture future opportunities.”

With more than $23 trillion in high-net-worth investor assets still held outside of the industry in other advice models, independent advisors have an immense opportunity at hand.

Over the past five years, the number of new clients has surged by more than 24 percent for half of the Study participants, and in 2014 alone, top-performing firms added ten percent or more new clients, while the median firm added five percent more clients. Firms are also taking on larger clients; the average account size is now $1.9 million, and $3.9 million among the top-performing firms.

Beyond new client acquisition, firms are also successfully winning and keeping the trust of existing clients as evidenced by a median 97 percent client retention rate year-over-year. Furthermore, among existing clients, firms are increasing share of wallet – top-performing firms increased share of wallet by four percent in 2014.

The Study shows that the combination of new assets and larger account sizes has helped drive firm revenues over the past five years, with the median firm seeing revenue CAGR of 13.6 percent rate and top-performing firms experiencing 18.8 percent revenue CAGR. Larger account sizes have also resulted in improved revenue per professional. The median firm reported $554,000 revenue per professional in 2014 while the top-performing firms indicate revenue of more than $800,000 per professional.

Worldwide Investment Fund Assets Set a New All-Time High Record of EUR 37.8 Trillion in Q1

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Investment fund assets worldwide stood at a new all-time high of EUR 37.8 trillion at end March 2015, reflecting growth of 13.7 percent during the first quarter. In U.S. dollar terms, worldwide investment fund assets increased 0.8 percent to stand at USD 40.35 trillion at March 2015, reflecting the depreciation of the euro vis-à-vis the US dollar during the first quarter of 2015, according to the European Fund and Asset Management Association (Efama). Efama has released its latest international statistical release containing the worldwide investment fund industry results for the first quarter of 2015.

Worldwide net cash inflows increased in the first quarter to EUR 574 billion, up from EUR 495 billion in the fourth quarter of 2014, thanks to increased net inflows to equity, bond and balanced/mixed funds.

Long-term funds (all funds excluding money market funds) recorded net inflows of EUR 585 billion during the first quarter, a 54 percent increase from the previous quarter (EUR 379 billion).

Equity funds attracted net inflows of EUR 157 billion, up from EUR 138 billion in the fourth quarter. Bond funds posted increased net inflows of EUR 173 billion, up from EUR 87 billion in the previous quarter. Balanced funds also registered a large net inflow of EUR 213 billion, up from EUR 120 billion in the previous quarter.

Money market funds registered net outflows of EUR 12 billion during the first quarter of 2015, compared to net inflows of EUR 116 billion in the fourth quarter of 2014. This result is largely attributable to net outflows in the United States (EUR 70 billion), whereas Europe registered net inflows during the quarter of EUR 43 billion.

At the end of the first quarter, assets of equity funds represented 40 percent and bond funds represented 21 percent of all investment fund assets worldwide. Of the remaining assets, money market funds represented 11 percent and the asset share of balanced/mixed funds was 17 percent.

The market share of the ten largest countries/regions in the world market were the United States (49.2%), Europe (32.5%), Australia (3.9%), Japan (3.8%), Brazil (3.2%), Canada (3.1%), China (2.0%), Rep. of Korea (0.9%), South Africa (0.4%) and India (0.4%).

CTAs Outperform as Commodities Slump in July

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Julio ha sido un buen mes para los hedge funds — CC-BY-SA-2.0, FlickrPhoto: SuperCheeli. CTAs Outperform as Commodities Slump in July

Hedge funds are on track to deliver solid returns in July, up 1.4% month to date (0.4% last week). In line with our overweight recommendation, CTAs and Global Macro managers outperformed other hedge fund strategies.

Meanwhile, Event-Driven managers underperformed both last week and on a month-to-date basis, in line with our downgrade of the strategy from overweight to neutral early June. The event-driven strategy was negatively impacted recently due to its exposure to gold and energy related stocks. Asian event-driven managers have, on the contrary, delivered solid returns for a second week in a row, and contributed partly to compensate losses.

Philippe Ferreira, Senior Cross Asset Strategist Lyxor Asset Management enumerates the recent market developments have been supportive for hedge funds:

The sharp fall in commodity prices in July has supported CTA managers. They have increased their short precious metals/short energy positions since end-May. CTAs also have no EM currency exposure. The slump in several EM currencies since mid- July is not having any meaningful implication for hedge funds (some Global Macro managers are long MXN/USD but this is compensated by short EUR/USD).
CTAs are long GBP/USD and are thus capturing the hawkish tone of the Bank of England, which has expressed concerns over wage growth at its latest MPC meeting early July.
Finally, the earnings season in the US has been a tailwind for L/S Equity managers for the time being. Technology, industrials and commodity related industries (oil, gas and materials) have disappointed, but the aggregate exposure of L/S Equity managers to these sectors has been significantly reduced since end-May (see chart below). Meanwhile, consumer cyclicals, financials and health care have all reported earnings in line with or above expectations and these are precisely the sectors where the bulk of the exposures are concentrated.

Overall, the hedge fund industry has recently demonstrated its nimbleness. It has been protected against falling equity and bond markets in May/June by adjusting exposures downwards quite rapidly. But it has also captured the rebound that took place in July. The beta exposure of equity strategies has recently been increased in line with the improving risk sentiment.

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Middle East Investors To Spend US$15.0 Billion Per Year In Global Real Estate Markets

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15.000 millones de dólares salen de Oriente Próximo en busca de inversiones en real estate cada año — Photo: Gabriel de Andrade Fernandes . Middle East Investors To Spend US$15.0 Billion Per Year In Global Real Estate Markets

An average of US$15.0 billion per year will flow out of the Middle East into direct real estate globally in the near-term, with investors from the region increasingly targeting U.S markets, according to the latest research from global property advisor CBRE Group.

The Middle East continues to be one of the most important sources of cross-regional capital into the global real estate market, with US$14.0 billion invested outside of the home region in 2014—the third largest source of capital globally. Qatar, driven by its sovereign wealth funds (SWFs), was by far the largest source of outbound capital with US$4.9 billion invested. Saudi Arabia has emerged as a significant new source of capital globally, investing US$2.3 billion in 2014, up from almost no reported investment in 2013.

The Middle Eastern investor base has expanded, fueled by weakening oil prices; this has led to a major shift in global investment strategies towards greater geographic and sector diversification, with activity spreading across gateway markets to second-tier locations in Europe and the Americas. A greater proportion of Middle Eastern capital is now targeting the U.S.—the US$5.0 billion invested globally in Q1 2015 was almost equally split between Europe and Americas, with New York, Washington, D.C., Los Angeles, and Atlanta targeted. London, while retaining the top position, is no longer as dominant, with a 32 per cent share of all Middle East outbound investment in 2014, compared to 45 per cent in 2013.

Middle Eastern investors are becoming more active across a wider range of sectors. This is clearly evident in the U.S. where, historically, these investors have bought office buildings and trophy hotels in New York, Los Angeles and other gateway markets. Competition from Chinese investors and other global capital sources means that these investors are increasingly seeking alternatives, such as Abu Dhabi Investment Authority’s $725 million acquisition this year of a 14.2 million-sq.-ft. industrial portfolio.

Private, non-institutional investors (property companies, high net worth individuals (HNWI), equity funds and any other form of private capital) have emerged as a major and increasing source of outbound capital from the Middle East. With a greater allocation to real estate and more concentration on geographical diversification away from the home region, the potential for non-institutional investors to expand their global real estate investments is of growing importance. Weaker oil prices are a strong contributing factor to this, triggering and accelerating global deployment of capital, with value-add investments in high demand. CBRE forecasts that global real estate investment by non-institutional capital from the Middle East will range from US$6.0 to $7.0 billion per annum in the near-term, if not higher, increasing from approximately US$5.0 billion per year during 2010 to 2013.

“Private capital from the Middle East is once again becoming a measurably more important investor group globally. The most immediate change will bring down the average lot size, as non-institutional investors tend to target assets at circa US$50.0 million. This extends naturally to a more diverse investment strategy—a trend already felt in the market so far in 2015 and is expected to become more pronounced in the next six to 18 months. In particular, we expect the Americas region to see more capital flows from the Middle East, with Europe less dominant than it has been over the last five years,” said Chris Ludeman, Global President, CBRE Capital Markets.

Henderson: Waiting in The Wings

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Henderson: Esperando para salir a escena — CC-BY-SA-2.0, FlickrPhoto: Hernán Piñera, Flickr, Creative Commons. Henderson: Waiting in The Wings

With Greece’s theatrics dominating the world stage, investors may have missed some compelling stories unfolding in the wings. Bill McQuaker, Co-Head of Multi-Asset at Henderson, spotlights three of his favourites: oil, emerging markets and job creation.

Oil: a new script

If investors thought oil’s slump was over, they were wrong. Rising US demand for petrol (gas) has been met by unfettered global supply, with prices heading south of US$60 again. Credible explanations include: an urgent need for foreign currency (Russia/Venezuela); the desire to re-assert control over the market (Saudi Arabia); and new supply (Iran). We also suspect innovations in horizontal drilling and re-fracking are only beginning to drive US oil field economics, pointing to over-supply in the immediate future.

Implications? We see three. First, the renewed sell-off may finally persuade consumers that low prices are here to stay. Expect the contributions to GDP growth from (particularly US) consumption to strengthen. Second, some oil producing countries may suffer further currency weakness, heaping pressure on their central banks to tighten policy; a financial shock to accompany an oil price collapse is a possibility, particularly if US rates rise soon. Third, price weakness is evident across the whole commodity complex. Investors who made a strategic allocation to commodities at their height may capitulate – posing opportunities for those who steered clear.

Wages: enter NAIRU

You know the world is a strange place when Conservatives announce “Britain needs a pay rise”, while an unpopular Chancellor is congratulated for announcing a new “National Living Wage”. Clearly, mounting political pressure to share the spoils of recovery is having an effect. And it is not just a UK phenomenon. US politicians are pushing for higher minimum wage levels, and state legislators and corporates are showing signs of responding. Walmart, which has a legendary reputation for cost control, is leading the way in raising wages for 500,000 of its lowest paid staff.

Calls for higher wages are not just the result of political processes. Rapid rates of job creation have seen unemployment rates collapse in the UK and US. Many economists believe we are very close to, or at, NAIRU: the rate at which falling unemployment begins to exert upwards pressure on inflation. Tight labour markets are leading to similar dynamics in Germany and Japan.

None of this is lost on policymakers, with central banks in the US and UK preparing the way for rate rises soon. Will a bull market built on generous liquidity conditions crumble if central banks are forced to raise rates? We suspect not, but do anticipate a pick-up in market volatility: good for those investors with some cash to invest.

EM: curtain call?

The outperformance of developed markets (DM) over emerging markets (EM) in recent years has been immense. The S&P 500 has roughly doubled since the US debt-ceiling debacle (August 2011), alongside MSCI EM’s c5% rise (USD terms). The explanatory narrative cited is: slow EM growth, weak commodity prices, and a desperate need for structural change. The fact that many of these points could just as easily be applied to DM is often ignored.

This cannot last: disenchantment with all things ’emerging’ looks to be approaching fever pitch, reminding us of the haste to be rid of ‘old economy’ stocks in H2 1999 and early 2000. We are not inclined to stick our heads above the parapet just yet, but when the liquidity-driven bull market gives way to a downturn, the best buys may well be found in EM, and in the unloved companies listed in the West that service them.

Only 15% of US Hedge Fund Managers Are Now AIFMD Compliant, Compared to 82% of European Managers

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Preqin’s latest survey of global hedge fund managers reveals that most UK- and Europe-based hedge fund managers are AIFMD-compliant: Almost all (90%) of UK-based firms, and 82% of fund managers across the rest of Europe. By contrast, there has been slow uptake among firms beyond the EU’s borders; a quarter of hedge fund managers based across Asia and Rest of World currently comply, and only 15% of firms based in the US.

A large proportion (42%) of fund managers based outside the EU do not plan to raise capital from EU investors in the near future; of this group, 59% are avoiding the region due to concerns about the AIFMD. Many managers based outside the EU are relying on investors to approach them through reverse solicitation. Even so, 38% of US managers have chosen to avoid the EU completely, with most citing compliance costs and the risks arising from uncertainty and lack of guidance surrounding the directive.

The negativity surrounding the AIFMD has reduced over the past six months, with 45% of respondents to Preqin’s June 2015 survey believing the Directive will change the hedge fund landscape for the worse, compared to 58% as of December 2014.  

Despite the majority of UK firms being compliant, not a single UK hedge fund manager surveyed expected the AIFMD to have a positive impact on their firm in the coming year. This compares to 55% of non-UK EU hedge funds that believe it will have a positive impact.  

Two-thirds of firms globally reported that the costs of complying with the AIFMD are higher than expected. No fund managers reported the costs as lower than expected.

The largest fund managers are more likely to be compliant with the AIFMD regulation; 46% of fund managers with more than $1bn in AUM are compliant, compared to 19% of those with less than $100mn. Forty percent of firms with less than $100mn in AUM will not be marketing a fund within the EU at all.  

“As we approach the 22nd July anniversary of its implementation, the AIFMD has had a varied effect on the hedge fund industry. While general negativity towards the regulation has fallen over the past six months, 45% of fund managers still believe the AIFMD will change the industry for the worse, and only 23% feel it will have a positive impact. Although in Europe most hedge funds are AIFMD-compliant, only a relatively small number of fund managers from beyond the EU’s borders have acquired compliance status. Despite having one of the highest levels of compliance (90%), not a single UK-based fund manager felt the directive will have a positive impact on their business.

Many non-EU fund managers are choosing to avoid investment from the region completely, which may result in a reduced choice of funds available for investment for EU-based investors. The leading concern hedge fund managers have about the new regulation is the increased costs of complying with the EU directive, with two thirds of those managers that have acquired the passport stating the costs have been higher than they originally expected”, said Amy Bensted, Head of Hedge Fund Products, Preqin.