A global hedge fund association has said the European Securities and Markets Authority’s (ESMA) proposals on the Alternative Investment Fund Managers Directive (AIFMD) are “measured”, though several major areas of concern remain.

The Alternative Investment Management Association (AIMA) has responded to ESMA’s consultation on the directive, highlighting proposals relating to depositaries, leverage, valuation, transparency, and liquidity.

On depositories, an AIMA study into the potential impact found that, under the most adverse scenario, the total cost to hedge funds of implementing the more “draconian” options proposed in the paper could be more than USD $6bn.

The association said the directive could lead to such high costs because depositaries would sharply increase their fees to funds to compensate them for the strict liability they would be expected to absorb for any losses incurred by unaffiliated sub-custodians which the former cannot realistically control.

Those costs would “inevitably” be passed on to hedge fund investors such as pension funds, charities, universities and insurers.

AIMA chief executive Andrew Baker congratulated ESMA on a “job well done in difficult circumstances”. The association hoped ESMA would finalise the advice in the “independent and evidence-based spirit” in which they produced this consultation document.

However, a number of issues with the potential to cause difficulty remained.

“While some of the proposals made by ESMA in this area are undoubtedly welcome, we are concerned that some of the options on the table are so extreme that the eventual regime could end up being not only wholly unworkable but also potentially dangerous by greatly increasing systemic risk. We would urge ESMA to look again at these proposals and opt for the more practicable options they put forward,” Baker said.

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