Has Middle East unrest hit hedge funds?

Published on The Malta Independent¸ issue 27th January 2011
It comes as no surprise that the unrest in Libya and the rest of the Arab world has upset the investment world. It directly affected the price of oil that hit the unprecedented high of $119 per barrel.This week¸ we are witnessing a massive exodus of expatriate staff leaving the oil fields in the Sahara desert¸ as well as other experts pulling out of Libya. Again during the unrest in Egypt the possibility of the Suez Canal being blocked to oil tankers also pushed up the level of uncertainty and political risk. Analysts at Goldman Sachs and Deutsche Bank warned that given the sluggish growth of both European and even more the US economies¸ a heavy increase in oil price will not be sustainable and leads to higher inflation.

Again social unrest compounds the problem for hedge funds and other types of funds as the resulting albeit temporary uncertainty will exacerbate the chances of a fast recovery.

Let us also consider its effect on the fast-growing markets such as Latin America¸ China and Russia where increasing wealth is prompting a greater focus on investment planning and structuring issues. Here surplus funds are seeking safe shelters and it comes as no surprise that investors demand higher regulatory protection.

At the same time¸ we hope that an upturn already evident in fund activity in emerging countries will lead to an overflow of such funds to seek shelter in Europe. One hopes that the current unrest hitting Europe due to higher oil prices is only temporary and that the markets will stabilise given the fast revival of the Asian and emerging countries. Leaving aside the turmoil hitting the oil rich Arab countries¸ one hopes that the alternative funds industry continues to demonstrate an encouraging recovery away from the downturn experienced in the past three years.

As markets strengthen¸ there is greater appetite for funds¸ although investor attitudes remain cautious and the fund-raising environment for start-ups is more challenging than a few years ago.

To make matters more complicated¸ regulators on both sides of the Atlantic have introduced stiffer rules. Regulatory changes such as the Dodd-Frank Act in the US¸ and the European Union’s Directive on Alternative Investment Fund Managers¸ are both formidable tools in their respective arsenals to tighten up an otherwise lax attitude towards the goose that lays the golden eggs. In a world of increased regulatory focus¸ it’s incumbent upon each European jurisdiction including Malta to attract a fair share of funds that are seeking shelter particularly from the so-called BRIC countries. So¸ in a nutshell¸ what is the Alternative Investment Fund Managers (AIFM) directive and how can Malta gain from it?

The Directive adopted in November 2010 contains new rules on the marketing of alternative investment funds in the EU by both European and non-European managers. It introduces for the first time the concept of a “passport” through which authorised AIFMs can market EU AIFs to professional investors throughout the EU¸ subject to a notification procedure.

The passport for EU AIFMs marketing EU AIFs comes into effect in 2013. It will apply to all EU and non-EU AIFMs¸ irrespective of where the AIFs are domiciled. Thus it will enable non-EU AIFMs to market across the EU without first having to seek permission from each member state and comply with different national laws. On the other hand¸ non-EU AIFMs will only obtain a pa