Tue, Oct 03, 2017 - Page 11 News List

EU directive sees hedge funds coming together


With Markets in Financial Instruments Directive II (MiFID II) looming, hedge funds are concluding there is strength in numbers.

Smaller money managers are increasingly clubbing together on platforms to share the costs of the EU’s regulatory overhaul, and get help with the paperwork and legal hurdles of compliance.

With three months to go before the rules take effect, Joe Vittoria of Mirabella Advisers says his platform has “never been busier,” while Michael Williams of Brooklands Fund Management reports a jump in demand for the “economies of scale” his firm offers.

Platforms are packages of applications and services that firms can tap to lower administration costs. They take many of the bread-and-butter aspects of business out of the hands of investment managers, leaving them free to focus on making money.

That makes them useful for hedge funds, which are having to deal with the revised MiFID II just as they struggle with high startup costs, lackluster returns and an investor exodus.

Whether to join a platform “wasn’t even a question,” London-based Lightfield Capital founder Samuel Gruen said.

He launched his hedge fund via Brooklands Fund Management last year with US$20 million of assets.

“The industry is changing and 2 percent management fees aren’t happening anymore,” Gruen said.

Even if it is rarely the sole factor in prompting hedge funds to band together, MiFID II is “an extra cost and hassle,” he said.

Platforms can help mitigate these costs.

Startup costs for a hedge fund in Europe are at least US$500,000 and can go as high as US$2 million for certain strategies, Amsterdam-based Privium Fund Management BV chief executive Clayton Heijman said.

From Jan. 3, hedge funds and other clients have to pay for research reports separately from broking commissions, with prices quoted by banks ranging from thousands of dollars to hundreds of thousands.

Platforms can also hire staff to deal with the new regime’s more onerous reporting requirements and give smaller money pools extra bargaining power. Sometimes they charge a fee for their trouble — other times, particularly in the case of hedge fund start-ups, they take an equity stake.

More hedge funds are getting on board.

Mirabella is in the process of signing up five new clients, which should be in place by the middle of next month and which will boost the number of funds on the platform to 32, Vittoria said.

That is up from 17 two years ago.

“Regulatory change and the complexity of it has always been a feeder for fund-platform businesses,” he said. “We’ve never been busier and it’s probably true for a lot of the other platforms.”

The barrier to market entry is “so high” for hedge funds these days “and MiFID II — which is onerous because of the research, the trade reporting and record keeping — adds to that,” Williams said. “We’re definitely seeing an increase in activity.”

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