Hedge fund investors worried EU plans limit choice

Date: Friday, September 18, 2009
Author: Laurence Fletcher, Reuters

Institutional investors said on Thursday that draft European Union rules that could bar non-EU fund managers from marketing their products in the region could limit their investment choices and upset their portfolio balance.

U.S. managers "would effectively be excluded from the EU market," a senior fellow at the U.S. Securities and Exchange Commission asserted at a conference hosted by the Financial Services Authority.

"Choice is the biggest single area of concern for us," said Jeremy Hill, general counsel for the Universities Superannuation Scheme (USS), which runs 24 billion pounds in assets.

"In order to meet (our) target (allocation) it's absolutely essential we have freedom of choice to access the best managers, regardless of where they are."

The rules, which could be adopted in 2012, are designed to protect investors and reduce systemic risk. One contentious area is a plan to bar non-EU fund managers from offering products to EU investors unless their countries had equivalent rules.

USS and Hermes, which manages BT's pension scheme, said the EU Alternative Investment Fund Managers directive could stop them from investing with hedge fund managers based outside the region.

Hill noted that typically more than half of hedge fund managers USS invests with are based in the United States.

"If the directive were to have the result (that) we couldn't access U.S. private equity managers, for example, that ... would throw our portfolio construction into some difficulties," he said.

Kathryn Graham, director of liabilities at Hermes, said her firm needed a wide choice of investments.

"The people we represent cannot afford to have large amounts of their pension pot disappear through us investing in beta products (whose returns are strongly linked to market movements). We need alternative investments," she said.

"We also need to have a diversified portfolio to achieve those gains. We cannot be curtailed by this sort of legislation," she added. "We need to be able to invest in ... the best managers."

"HEARTENED"

However, USS's Hill welcomed suggestions at the conference from French regulator AMF that individual member states could allow offshore funds to offer products locally.

"I was very heartened by the discussions indicating there may be movement on the definition of marketing for example. For us, if our portfolio managers can continue to ... make contact with managers in the U.S. then that immediately removes a large part of our concerns, (though) not all."

Investors also said on Thursday they had found making their voice heard difficult.

"I've certainly taken every opportunity ... to stand up and say I'm available to be part of the consultation process," said Hermes's Graham. "I have been severely disappointed how little we've been asked to be involved in almost any of the initiatives that I've seen."

"You can't say you want to be part of the process," said Peter Montagnon, director of investment affairs at the Association of British Insurers. "You have to barge in and make yourself part of the process."