A survey by BNY Mellon shows there remains “significant uncertainty” about what is required under sweeping new European Union rules on hedge funds and other alternative investment vehicles that came into force yesterday.

A survey by BNY Mellon shows there remains “significant uncertainty” about what is required under sweeping new European Union rules on hedge funds and other alternative investment vehicles, with two-thirds of respondents fearing a squeeze on returns and choices for clients.

Among the findings was the view, held by 88 per cent of 70 respondents from across the world, that the total expense ratio – a broad measure of fund costs – will rise as a result of the Alternative Investment Fund Managers Directive, which takes effect from yesterday. The directive is designed to tighten oversight of the sector after EU lawmakers claimed stronger controls were needed after the 2008 financial crisis.

A number of reports in recent days suggest the investment sector is not fully prepared for the directive, one of a number of regulatory moves by policymakers in recent years.

The directive sets out detailed rules on matters such as transparency, how businesses are run, leverage and financial reporting. Such EU-based fund managers must also appoint an independent custodian for each alternative investment fund they manage, and have independent risk management and valuation functions. The directive has been controversial: there have been fears that non-EU jurisdictions, such as the Cayman Islands – a major hedge fund hub – could face hurdles in selling into the EU market. 

Today’s survey, drawn from respondents in Europe, Asia, the US and Latin America, together managing more than $5 trillion, showed that half of respondents believe uncertainty remains within their organisations, while a third reveal a fear of not complying on time and of negative financial implications.

Some 50 per cent believe that their organisation will be disadvantaged in some way by AIFMD over the medium term.  Only 18 per cent believe there to be a benefit.

While 58 per cent have a project team in place to deal with the issue, 73 per cent do not expect to apply for authorisation before 2014, the survey showed.

Among other details, respondents said that initial AIFMD project/one-off costs will range from between $300,000 to over $1 million per institution. Some 67 per cent of persons polled believe that AIFMD will result in the absolute number of alternative funds decreasing, while 39 per cent said their organisation will close some funds, move funds outside of the EU or merge funds together.

Also, two thirds of survey respondents believe the cost and complexity of compliance will lead to reduced choice of opportunities for investors.

“The findings indicate that over half of respondents do not expect the AIFMD requirements to be adopted by other jurisdictions. 62 per cent believe that investors will keep their money in European-domiciled funds rather than invest in jurisdictions with less onerous requirements,” the bank said.

“Despite today being the deadline to apply for authorisation under AIFMD, much work remains for the industry to achieve full compliance, with our research suggesting that the burden of regulation could even lead to a lower number of funds available to investors,” Hani Kablawi, EMEA head of asset servicing at BNY Mellon, said.

“Despite attempts to improve investor access and information, the industry is challenged by the complexity of implementing AIFMD and the need to comply with it in the future. This is a demanding time for the industry as it grapples with the slew of further regulation under implementation or discussion across Europe,” he said.

The bank added that is it ready to provide full depositary services to asset managers impacted by the directive.