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The Morning Brief: U.S. Managers Think AIFMD Will Harm the Industry

A growing number of hedge fund managers think a new European Union rule aimed at alternative investment funds that goes into effect on July 22 will hurt the hedge fund industry. U.S.-based managers are most concerned about the new rule, known as the Alternative Investment Fund Managers Directive, or AIFMD, which has requirements related to risk and liquidity management, transparency, reporting and other practices and is believed will affect how hedge funds market their products to EU investors.

Some 59 percent of all hedge fund managers think AIFMD will adversely impact the hedge fund industry, according to a new survey from London-based data and research provider Preqin. This compares with 53 percent who held this view in December 2013 and 29 percent in December 2012. The survey also found that 22 percent think the new rules will have no impact and just 20 percent think they will be a positive development for the industry.

However, 71 percent of U.S.-based hedge fund managers think AIFMD will have a negative impact on the industry. What exactly are the managers’ biggest concerns? They cited compliance costs as number one, mentioned by 43 percent of all respondents and 53 percent of Europe-based managers, excluding those in the U.K.

“Although many European fund managers have already made sure their funds are or will be compliant, many US-based firms have not, and a significant proportion have decided to not actively market in the EU,” Preqin states. “They may instead rely on private placement regimes or reverse solicitation, or simply not look for capital from EU-based investors. However, with institutions in the EU representing a fifth of all institutional capital at work in hedge funds today, these managers may need to take on the extra stresses required to comply with the AIFMD in order to secure important investor capital.”

Call it a hedge fund love fest. According to a sentiment survey conducted by Credit Suisse, 97 percent of institutional investors plan to be “highly active” in making allocations to hedge funds in the second half of the year. Of this group of 284 global institutional investors representing $544 billion invested in hedge funds, 85 percent said they had been active making allocations in the first half of the year.

“The high percentage of respondents with strategic intention to actively allocate to hedge funds in the second half of this year could reflect a prolonged due diligence process, in response to high levels of market volatility back in March/April,” says Robert Leonard, managing director and global head of capital services at Credit Suisse, in a press release. The three strategies most in demand in the Americas: event driven (51 percent), long-short equity/fundamental (46 percent) and emerging markets equity (28 percent). On the other hand, Credit Suisse says overall investor demand continues to decline for global macro strategies.

Casablanca Capital said it received support from two major proxy voting and corporate governance advisory firms — Institutional Shareholder Services (ISS) and Glass Lewis & Co. — in its proxy fight with Cliffs Natural Resources Inc. Casablanca, led by Donald Drapkin, quotes ISS stating: “The dissident has made a compelling case that a change to the composition of the board is necessary at this time.” It quotes Glass Lewis stating: “Shareholder support for most of the dissident nominees would send a strong message to the board that the company’s long-tenured directors need to be held accountable for the company’s performance.”

For its part, Cliffs said the two proxy firms recommend that shareholders support four of the activist hedge fund’s six nominees. However, it lamented that since shareholders vote for an entire slate of directors, those who support Casablanca will wind up voting for all of its nominees and give the hedge fund majority control of the board. “This result would be contrary to the ISS and Glass Lewis recommendations,” the mining company states. Cliffs also said Egan-Jones Proxy Services, a lesser known and smaller proxy advisory firm, recommended that Cliffs shareholders vote for all of Cliffs’ director nominees at the July 29 annual meeting.

Paul Singer’s Elliott Management raised its stake in Riverbed Technology to 6.1 percent. In January the New York–based hedge fund firm offered to buy the network equipment maker for $19 per share in cash. In February Riverbed rejected Elliott’s higher price of $21 per share. In April Elliott fired off a press release reaffirming its interest in acquiring Riverbed. Kenneth Moelis’ Moelis & Company is Elliott’s M&A advisor, according to a regulatory filing. Moelis appeared with Trian Fund Management’s Nelson Peltz on an activist panel at Wednesday’s Delivering Alpha conference.

William Ackman’s Pershing Square Capital Management is down more than 1 percent in the first half of July. As a result, it is up 24 percent for the year through July 15.

Shares of both classes of hedge fund favorite Google rose more than 1 percent in after hours trading after the ubiquitous Internet giant reported second quarter results. Earnings came in below expectations but revenues beat forecasts, which excited investors and analysts.

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