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Hedge fund regulation in mature capital markets

AIMA Presentation

16/06/2014

AMAC Annual Conference 2014, Beijing

Jack InglisChief Executive Officer, AIMA

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ContentsAbout AIMA

Industry trends

Typical hedge fund structures

Regulatory environment

Conclusion

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About AIMA

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Industry trendsAIMA Presentation

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Historical industry growth

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0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Year

Assets

($

MM

)

Source: Hedge Fund Research

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Billion-dollar club

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Country Number of managers

Percentage of total number of managers in global billion dollar

club

AUM ($ billion)

Percentage of total AUM of billion dollar

club

USA 281 68.7% 1,642.9 74.8%

UK 59 14.4% 294.3 13.4%

Hong Kong 14 3.4% 28.5 1.3%

Brazil 8 2.0% 31.1 1.4%

Singapore 7 1.7% 12.9 0.6%

Sweden 4 1.0% 35.7 1.6%

France 4 1.0% 12.8 0.6%

Australia 3 0.7% 19.1 0.9% Switzerland

3 0.7% 4.0 0.2%

Canada 3 0.7% 5.7 0.3%

Other 21 5.1% 109.0 5.0%

Total 389 100% 2,196.1 100%

Source: HedgeFund Intelligence, December 2013

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Historical industry performance

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14Hedge Funds (HFRI FWC) Equities (S&P 500) Commodities (CRB) Bonds (Barclays Global Aggregate ex-USD) Property (Case-Shiller 10-City)

70%

55%

66%

23%

7%

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Hedge fund investor base

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Source: Barclays Capital Solutions, “Waiting to exhale”, January 2014

8%

9%

24%4%

4%

30%

Public Pensions

Private Pensions

Endowment & Founda-tions

Insurance Companies

Private Banks

Family Offices

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Typical hedge fundstructures

AIMA Presentation

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Typical structures

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Hedge Fund Manager

Offshore Master Fund(e.g. Cayman)

Service providers(Custodian/

Prime Broker/ Administrator)

Onshore US Feeder Fund(e.g. Delaware)

Non US - US tax exemptinvestors

US taxpayinginvestorsRegulat

ors

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Hedge fund domiciles

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Cayman Islands39%

United States23%

Luxembourg12%

British Virgin Islands10%

Ireland6%

Bermuda2%

Brazil1%

Australia1%

Sweden1%

United Kingdom1%

Others4%

Source: Eurekahedge

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Regulatory environmentAIMA Presentation

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Regulatory goals and intensity (pre-crisis)

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Focus on retail

Focus on banks

Basic supervision

of participant

s,activities

and products

Removing

stock exchang

e monopoli

es

Trade transparenc

y in equity markets

Standard

market abuse rules

Market Integri

ty

Market efficien

cy

Competition

Supervision Financial

stability

Investor Protecti

on

Reg

ula

tory

in

tensi

ty

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Regulatory goals and intensity (post-crisis)

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•Even greater retail protection

•Professional investor protection

•Mandated central clearing•& margin for OTC

•New banking regulation

•SIFI focus

•Greater intrusion

•New tools and powers

•New institutions

•Unbundling

•Level playing field for exchanges/ dealers

•New Participants

•Market transparency in non-equities

•Multilateral trading venues

•Data Reporting

• Increased Product Scope

•Heightened sanctions

• Increased enforcement

Market Integrit

y

Market efficienc

y

Competition

Supervision Financial stability

Investor Protectio

n

Regula

tory

in

tensi

ty

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Regulatory impact

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Hedge Fund Management Company

Hedge Fund

Markets Trading

TAX

Distribution

Management and operations

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Regulatory impact

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Hedge Fund Management Company

Hedge Fund

Markets Trading

TAX

Distribution

Management and operations

UCITS

ELTIF

Title

IV

MAD

AIFM

D

EMI

RMiFIR

BEPS

CPO/PQR

Title

VII

FATC

A

CRD/CRRJO

BS

Form PF

FTT

MiFI

D

40 ACT

Key areas affected by regulation

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Management and

operations

Registration and

authorisation

Organisational

requirements

Transparency and

reporting

Remuneration

Risk, liquidity

and leverage

Service providers

Distribution Private placement

Marketing and advertising

Investor classification Due diligence

Markets Algorithmic and HFT Derivatives Market

structures Position limits Short selling

Tax Taxation on the fund

Taxation on fund investments and cash/asset flows

Taxation of investors

Anti-evasion/avoidance

AIMA’s role in the reform process

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Policy and Regulation

• Asset Management Regulation, Markets Regulation and Tax Affairs

• Advocacy

• Policy Research

• Compliance Toolkits

• Sound Practice Guides

• Due Diligence Questionnaires

Education and Communication

• Media Relations

• Member Communications

• Membership Services

• Events

• Industry Research

• Investors

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ConclusionsHedge fund industry is heavily regulated in all key mature jurisdictionsIndustry went through the financial crisis and did not cause systemic problemsRegulatory intrusion requires greater operational sophistication and that comes at a cost.............But compliance gives institutional investors greater confidence

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ContactJack InglisChief Executive Officer, AIMATel: +44 (0)20 7822 8380Fax: +44 (0)20 7822 8381Email: jinglis@aima.orgWeb: www.aima.org

16/06/2014