The latest ESMA Report on Trends, Risks and Vulnerabilities (No. 1, 2018)[1] has some interesting comments on the workings of annex IV reporting. Approximately 60% of the AIFs managed or marketed in the EU by authorised asset managers are reporting. According to ESMA “Not all of the data currently reported show an adequate level of quality”.

Only 4% of AIFMs are Registered AIFMs with 96% being authorised and subject to the full rigours of Annex IV reporting. Thus it would seem AIFMs feel the value of the passport is worth the additional trouble (of course once the AIFMs AUM crosses the €100m level it does not have a choice as to whether to comply or not). Interestingly registered AIFMs have an average NAV size of €50m (median €10m) with the average size of a registered AFIM being €160m (median €30m). ESMA notes – as is evident from the difference between the mean and median – that the AIF industry is dominated by a small number of very large funds. Just 2% of funds are above €1 billion in size yet they hold circa 46% of total AUM. Some 95% of AIFs are less than €500m and hold 40% of total net assets.

Other interesting snippets highlight that Fixed Income is the dominant investment strategy (33%) and unsurprisingly Europe is the dominant investment region (65% of assets domiciled in the EEA) underscoring “the importance of the sector to the financing of the European economy”. Insurance and pension funds combined hold 40% of the assets managed by EU AIFMs (so PRIIPs will be of relevance and growing in importance).

ESMA are taking increasing interest in the liquidity of underlying portfolios: “Potential mismatches between these two liquidity profiles constitute a key structural vulnerability of asset management activity, particularly with regard to open-ended vehicles”. The “two liquidity profiles” refers to “both the ability to sell portfolio assets, considering timeliness and related costs, and to the liquidity offered to investors who want to redeem shares in a fund.” ESMA notes that “the Directive requires the AIFM to disclose to investors a description of the AIF’s liquidity risk management, including the redemption rights in both normal and exceptional circumstances, and the existing redemption arrangements with investors”.

The difficulties of property and fund of funds with regard to liquidity mismatch is highlighted. On the other hand “hedge funds show no signs of liquidity mismatch. This likely reflects their preference to respond and try to adapt quickly to market conditions, thus resulting in investments in more liquid instruments. Additionally, hedge funds hold a high share of unencumbered cash, which could be broadly defined as outright cash or cash-like securities,” On average hedge funds hold 16% in unencumbered cash.

In terms of leverage the paper highlights that “AIFs rely strongly for their funding on reverse repurchase agreements, which account for almost 60% of the total borrowings.” Hedge funds’ financing liquidity is short with 70% of their borrowings having a term of less than a day.

In their conclusion ESMA reiterates that data quality remains an issue. Institutions reporting under Annex IV have been given a few years grace to put appropriate systems and reporting lines in place. It is unlikely this forbearance, and the regulators’ patience, will last for ever.


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