Hedge funds : was the AIFMD really necessary?

Abstract

The 2008 financial crisis brought with it a wave of far-reaching financial regulation, this was seen as an attempt to not only fix the damning effects that followed such crisis, but also to mitigate systemic risk and to restore consumer confidence, both within and outside of Europe. The above was echoed through the implementation of the Alternative Investment Fund Managers Directive, which came into force on the 22nd of July 2013. The scope of this Directive is to regulate fund managers of Alternative Investment Funds and hence, Alternative Investment Funds themselves (this thesis will mainly focus on hedge funds). ! Hedge funds have the ability to, one the one hand assist in enhancing the financial market through the production of benefits which they are known to generate, however, on the other, they are also known to contribute to systemic risk which may potentially have a negative impact on the broader financial system. It is for this reason that the effect which hedge funds have had and till today, still have on financial stability has been labeled as being fairly perplexing and has created diverse responses and opinions. This thesis provides an overview of the Alternative Investment Fund Managers Directive and evaluates the impact which it had on key players within the industry. Additionally, the author also dedicated part of this study to examining whether the contribution hedge funds had on the financial crisis was to such an extent that attributing full blame on them is considered to be justifiable, or, whether there was some ulterior motive behind the push for their regulation. This thesis concludes that while the characteristics attributed to hedge funds make them more liable toward the contribution of systemic risk, when compared to other larger complex financial institutions (LCFI’s) their involvement is dwindled to such an extent that the statement ‘hedge funds were the cause of the 2008 financial crisis’ no longer holds any ground. For this reason, the author concludes that the Alternative Investment Fund Managers Directive was not necessary.