EC threat to alternative investment funds

Directive on Alternative Fund Managers will apply to all non-Ucits products and could lead to overhaul or closure of some funds

More than 1,000 retail investment funds fall under European Commission proposals designed to create a set of rules governing currently unregulated vehicles like hedge funds.

The Directive on Alternative Fund Managers may result in some UK Oeics and unit trusts having to radically change their portfolios or in a worst case scenario close all together.

Data provider Lipper estimates the proposals in their current form affect over 1,000 UK-distributed products and the IMA says non-Ucits funds run by its members had assets under management of £15bn as at the end of 2008.

If it comes into force, the Directive will introduce a 'harmonised comprehensive and effective regulatory and supervisory framework for alternative investment fund managers in the European Union' and is predominantly designed to cover hedge funds.

It is designed to create greater transparency on the activities of hedge funds but will also apply to Nurs and other non-Ucits portfolios.

The directive defines alternative investment funds (AIFs) 'as all funds that are at present not harmonised under the UCITS Directive.'

It lists closer monitoring of risk management, more disclosure of corporate activity in companies AIFs own and developing a single market for the products among its aims.

Miton Asset Management director Martin Gray, who runs the company's non-Ucits Arcturus fund, says increasing the administrative burden on non-Ucits funds may result in some vehicle converting to Ucits status which will meaning they would have to drop some of their alternative assets.

He adds this could also see companies closing funds, where repositioning is considered uneconomical.

He says: "There must be a few people getting a bit panicky about this. They are going to get caught up in all kinds of hedge fund reviews and questions. Overhead costs to the business are going to go up.

"They will look at their range and think it is not worth keeping them as non-Ucits, question whether it is worth converting them back to Ucits whether they should just close them.

"It basically renders a whole range of UK retail funds less attractive to the groups running them and to investors."

Mark Harris, director in charge of eight multi-manager funds in the Henderson New Star range says the rules may have an effect on the company's fund range.

The group uses the Nurs structure for its range and he said under the new directive funds prohibited make up between 6% and 18% and 6% of his portfolios, and include a US property equities hedge fund and an African opportunities fund.

He says: "The decision to go to Nurs was because they have wider powers. Unregulated vehicles can make up to 20% of any given fund.

"In our portfolios they are mainly hedge funds where we are trying to introduce an element of diversification to the portfolio

"The EC will have to nuance which funds they include and maybe it will be subject to change.

"If it is going to dramatically change the way we manage money then going to Ucits is something we would have to consider. No one is particularly keen on over-onerous costs."