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Magazine Issues » October 2013

SPONSORED ARTICLE: Regulation and AIFMD: Data is key

Bob-KneipThe wave of fund management regulation seen in recent years has raised new challenges for the industry. Bob Kneip, chief executive at KNEIP, argues that the obligations brought on by regulation can indeed be opportunities.

In the 20 years since I founded KNEIP, the fund management industry has matured a great deal and the pace of the changes that fund managers have experienced has only accelerated since the recent financial crisis. Regulators and politicians have attempted to catch-up with the industry and ensure that the law reflects the reality of the new landscape.

This has not been a painless process. Implementing new regulation has involved delicately balancing the need to offer protection to investors, while preventing unnecessary negative impact on an industry that is already facing unprecedented cost pressures due to an ever more wary investor space.

In the current market, the buy-side requires more information than ever. An uncertain economic outlook, a political focus on curbing perceived excesses in the financial services sector and twitchy markets has left investors demanding more.

When a wave of new regulatory requirements is added to this scenario, it is clear why fund managers are preoccupied about the possible burden on their time and resources. Indeed, a recent KNEIP survey showed the extent of how much this is a worry, with 82% of managers high-lighting heavy regulation as the biggest challenge for the industry across 2013.

Specifically, concerns were raised over the pace and extent of numerous sets of new rules coming into effect, with Prips, UCITS, RDR and the AIFMD all coming in quick succession. Managers also pointed to the potential for reduced future profits due to restrictions placed on particular trading activities and added costs related to the time and money needed to build a back-office team.

Becoming compliant with regulation can be a time-intensive task for all of the fund management industry, but for some fund types, such as hedge funds, it can be particularly onerous. Hedge funds have traditionally been more opaque than other fund types, but managers that previously had slim back-offices have found that if they are above the AUM threshold of the AIFMD this is no longer a realistic option.

Put simply, managers of all types must find a way of dealing with their new obligations and the associated added pressure on cost, without it being too great an additional burden.

An obvious response has been hiring new staff. Change brought in by regulation can force fund managers to make important decisions that fundamentally affect their business, and so preparing for this requires a lot of additional work and extra man-hours. As a result, bringing in new employees, particularly specialists, into the back-office team can be an effective solution.

Indeed, KNEIP’s research has shown that in preparation for the AIFMD, 58% of alternatives managers have bolstered their back-office teams. While this is reassuring, as it shows that the vital preparation for the directive has begun in earnest, it is also clear that hiring new staff can be a very expensive endeavour due to the substantial overheads that it creates.

One cost-effective alternative can be outsourcing, which can help ease the burden of many day-to-day back-office tasks, allowing fund managers to concentrate on their core business of managing capital and making returns for their investors.

For many fund managers, outsourcing means working with external partners that can provide specialised software and services to help manage certain aspects of regulation, such as reporting requirements. Reporting is a particularly challenging area, as managing the process around collecting the data necessary for disclosure is no easy task. This was experienced under the UCITS framework and is now being seen by alternatives managers under the AIFMD.

For example, many managers that fall under the scope of the AIFMD have been surprised by the amount of time and effort required to gather together the 130 individual pieces of new data that are required to produce the reports for regulators. They must contend with a wide range of internal and external entities to capture information, then manage the process of requesting material at the right times, checking its validity and dealing with disparate file types.

As this data collection must be completed at a fund level on a quarterly, or sometimes six-monthly basis, with a relatively short turn-around, the amount of work required is substantial. For managers with numerous funds, the sheer amount of data points required means that the task quickly becomes a logistical challenge.

While it is possible for fund managers to develop their own in-house technology to help deal with such regulatory reporting and transparency requirements, the reality is that the substantial infrastructure costs make this an inefficient solution for all but the very largest firms.

As a result, external specialists such as KNEIP can play a big role. By leveraging a vast amount of expertise and employing tried and tested proprietary software, an outsourced partner can help ease this burden by allowing the easy creation of workflows and validation points, ensuring that effective process management takes place.

Partial outsourcing is often a viable option, but smaller or emerging managers that may lack back-office teams or resources, tend to outsource their back-office requirements entirely. This has been viewed as a solution for traditional managers under the UCITS umbrella and it is also becoming a popular choice with alternatives managers that are implementing the AIFMD.

The ability to share the cost of teams, processes, and infrastructure among several clients introduces efficiencies and features that would be economically non-viable for one to build and maintain internally.

As regulation is imperative in the fund management industry and the pace of new rules shows no sign of abating, the use of external parties to help with the new rules will likely continue to increase. For alternatives managers – who are now facing more scrutiny than ever – this is particularly the case, with KNEIP research showing that 77% are either considering outsourcing, or have already outsourced, some functions as they work to become complaint with the AIFMD.

Evidently, more and more of the fund management industry are now aware of the value that external partners can add in helping fund managers become compliant with a changing legislative environment.

For those fund managers that do choose to use external partners, it is essential that a firm is chosen that can be trusted as a regulated entity, with a wide team of experts, strong relationships with the relevant regulatory bodies and a strong bank of tried and tested technology to apply.

We believe that KNEIP is strongly positioned in this sense, and that is why we say that while it can be easy in a mature fund management industry to view regulation as a quagmire, it doesn’t have to be that way. Regulation is a challenge, but it is one that can be overcome and even turned into an opportunity if working closely with the right partners.

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