1. An update on Proposed EU Legislation on the Alternative Asset Management Sector
Robert Aitken
Head of Man Group Compliance

2. An update on Proposed EU Legislation on the Alternative Asset Management Sector
AGENDA
Background on Man Group plc
Background to the EU Proposals
The EU Draft Directive on alternative investment fund managers (“AIFD”)
Process and timing of the draft directive
Other potential impacts on hedge fund managers

3. Disclaimer and important information
This document is not an invitation to make an investment in any product to which Man Investments Limited (or any other member of Man Group plc’s group of companies) provides investment advisory or any other services, nor does it constitute an offer for the sale or purchase of bonds (or any other instruments) issued by any entity.
Information contained herein is provided from the Man database except where otherwise stated. Potential investors should note that alternative investments can involve significant risks and the value of an investment may go down as well as up. There is no guarantee of trading performance and past or projected performance is not necessarily a guide to future results. This presentation contains forward-looking statements with respect to the financial condition, results and business of Man Group plc. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Man Group plc’s actual future results may differ materially from the results expressed or implied in these forward-looking statements and estimates.
This material is communicated by Man Investments Limited, which is authorised and regulated by the Financial Services Authority.
Hedge fund styles & trading examples (Hedge-Fund-Stile und Transaktionsbeispiele)
Einführung in hedge funds

4. Man Group plc Corporate history
1783: Establishment of James Man as a barrel maker
1784: Navy rum supply contract; broking of sugar and other produce
1980s: Development of asset management alongside principal trading and broking
1989: Majority share in AHL purchased
1994: IPO; 100% AHL purchase completed
2000: Sale of commodities businesses: renamed Man Group plc, purchase of Glenwood
2002: Purchase of RMF
2007: IPO of brokerage business
Present: A world leading alternative investment management business

5. Man Group plc The headlines today
A world-leading alternative investment management business
Broad range of fund products for institutional and private investors globally, many with 20 year track records
A stable, well capitalised business
Listed and lead-regulated in the UK; working or regulatory relationships with relevant regulators across the globe
An integrated approach
Private investor intermediaries
Institutional clients
Distribution
Product development, structuring and management
Structuring
Multi-manager
Managed futures
Content
Fund of hedge funds, structured products, single managers

6. Regulatory Milestones Regarding Hedge Funds
New Financial Services Act
Formation of the Securities and Investments Board (“SIB”) and the self regulatory bodies (“SROs”) e.g. SFA and IMRO
Proposal to form new regulator – Financial Services Authority (“FSA”)
The near collapse of Long Term Capital Management (“LTCM”)
IOSCO report “Hedge Funds and other highly leveraged institutions"
Financial Stability Forum report into the collapse of LTCM published
Financial Services and Markets Act 2000 (“FSMA”) comes into force/Powers passed from the SIB and SROs to FSA
FSA publishes a discussion paper “Hedge Funds and the FSA” (DP16)
FSF publishes “Recommendations and Concerns raised by highly leveraged institutions”
Feedback statement on DP16 published
IOSCO: Regulatory and Investor Protection Issues arising from Fund of Hedge Funds
FSA publishes “Hedge Funds: a discussion of risk and regulatory engagement” (DP05/4) as well as a discussion paper on wider range retail investment products (DP05/3)
EU Green Paper on the enhancement of the EU framework for investment funds
Feedback statements on DP05/4 and DP05/3 published. Specialist Hedge Fund Manager Supervision team put in place at FSA
EU Expert Groups formed
IOSCO report on the regulatory environment for Hedge Funds
FSA publishes “Funds of Alternative Investment Funds (CP07/6)
Feedback Statement on CP07/6 published
EU Consultation on Hedge Funds published
The Turner Review
EU Conference on Hedge Funds (Feb)
- G20 Summit in London (Apr)
IOSCO Hedge Fund Oversight paper
EU draft directive on alternative investment fund managers (29/04/09)
Issues note by the Presidency on the AIFD (02/09/09)

7. Challenges – Hedge Fund Definition
Definition of Hedge Funds [IOSCO Hedge Fund Oversight paper]
Hedge funds – all those investment schemes displaying a combination of some of the following characteristics:
□ borrowing and leverage restrictions, which are typically included in collective investment schemes related regulation, are not applied, and many (but not all) hedge funds use high levels of leverage;
□ significant performance fees (often in the form of a percentage of profits) are paid to the manager in addition to an annual management fee;
□ Investors are typically permitted to redeem their interests periodically, e.g., quarterly, semi-annually or annually;
□ often significant own ‘funds are invested by the manager;
□ derivatives are used, often for speculative purposes, and there is an ability to short sell securities; and
□ more diverse risks or complex underlying products are involved.
Despite the broad characteristics described above, it is difficult to define hedge funds on a universal basis, given their different legal and business structures – not only across different jurisdictions but even within a single jurisdiction.

8. Regulatory Overlay of a Typical Hedge Fund Operation
Typically unregulated
Valuation Agent
Investment
Manager
Fund
Typically Regulated
Custodian
Regulated
Auditors
Auditors
Distributor
Prime Broker
Increasingly Regulated
Regulated
Retail
Investor
Institutional
Investor
Usually subject to regulatory constraints
Regulated
Markets
Unregulated
Off Exchange trading
Over- arching legislation will include anti money laundering, market abuse and anti fraud
2. Taxation legislation will impact both the fund and the manager

9. Turner Review – March 2009
Recognition that hedge funds are not the authors of the financial crisis, nor are they “shadow banks”
Recommendations aimed primarily at banking system, but still impact hedge funds
Focus: “macro-prudential” regulation (identifying and addressing trends in the financial system which could impact financial stability)
Hedge funds regulation: transparency and oversight
Information for regulators (e.g. leverage, liquidity)
Prudential regulation if funds become “systemically important” (not yet seen)
Possibility of global agreement to bring offshore products under regulation
Other recommendations
Increased capital requirements (“procyclicality”)
Enhanced levels of supervision by regulator
Strengthened clearing arrangements
International co-operation

10. G20 – Global Plan for Recovery and Reform – April 2009
Extend regulation and oversight to “systemically important” hedge funds or their managers
More information for regulators
Increased international co-operation in financial regulation
Contingency plans for international systemically important banks
Implement international best practice standards
Action against “non co-operative jurisdictions” regarding tax transparency
Possible sanctions
Review progress in November 2009
Supports industry best practice: FSB initiative
Current standards: HFSB; AIMA; PWG; MFA; IOSCO
Common standards being drafted

11. European Directive on Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs)
Applies to managers of all non-UCITS funds in EU (above de minimis)
Entitlement to market to professional investors throughout EU
General:
Regulatory capital requirements
Disclosure of prescribed information before and during investment, to regulators and investors
Liquidity matching between investment and underlying
Restrictions to be imposed on non-EU funds and managers’ ability to market into EU
Restrictions on delegation of portfolio management (to another AIFM only)
Possible restrictions on leverage
Rules regarding appointment of service providers: depositaries and valuators
Currently going through European Parliament process
Possible implementation 2011/2012

12. AIFD proposals – Broadly supported
Global manager authorisation (registration) and ongoing supervision
Enhanced transparency
Reporting of systemically relevant data
Resolution of cross-border marketing (passporting)
An aggregated short position disclosure regime to national regulators, as advocated in IOSCO’s paper on short selling

13. AIFD proposals – Issues
Third country aspects
Product level restrictions (e.g., leverage)
Depositaries (in HF world custodians/sub-custodians/PBs)
Exemptions for AIFMs as departments of banks should be withdrawn
Master-feeder structures
Harmonisation with other directives (e.g., MiFID, UCITS)
Threshold: disclosure of systemic data –vs- authorisation
Negative impact on institutional investors

14. AIFD proposals – Issues Third Country Funds (1)
EU AIFM marketing non-EU funds
Will only be able to market a non-EU (e.g., Cayman) fund into a MS if that MS has entered into an agreement with the non-EU domicile to share tax information.
Is there a need for a separate Tax Directive? Tax issues do not belong in a directive aimed specifically at a small section of the asset management industry.
During the 3 year transitional period, EU MS may allow AIFM to market non-EU funds to professional investors under existing national private placement rules. Non-EU funds will be at a competitive disadvantage to EU funds, particularly in countries such as France and Italy, which do not currently allow non-EU funds to be marketed even on a private placement basis.

15. AIFD proposals – Issues Third Country Funds (2)
Non-EU AIFM marketing non-EU funds
Only to be permitted where the Commission (not the MS) determines that the non- EU country where the AIFM is established:
has ‘equivalent’ legislation (not simply regulation) in respect of prudential regulation and supervision;
grants EU AIFMs comparable access to market to investors in the non-EU country; and
has entered into an agreement on sharing information on tax with the MS in which the AIFM is seeking authorisation to market.
Note: the EU and the USA have been unable to agree reciprocal access for UCITS funds and the US equivalent for over 20 years.

16. AIFD proposals – Issues Marketing – Fund of Hedge Funds
EU FoHFs would, in theory, be able to invest in non-EU funds whose AIFM is not established in the EU.
In practice, however, non-EU AIFMs would not be able to market the funds to the FoHF given the broad definition of the term ‘marketing’ under the proposed directive.
Therefore the definition of the word ‘marketing’ is too onerous.

17. AIFD proposals – Issues Leverage issues
Under current proposals, the EC is ‘required’ (rather than ‘empowered’) to intervene to set limits on leverage in certain circumstances.
The leverage level in the AIFD is set so low (x 1) that almost all hedge funds will have been deemed to meet it.
There are multiple definitions of leverage (e.g., balance sheet definitions versus P&L risk definitions). Any sensible definition of leverage must be risk weighted and allow for netting of offsetting positions.
Trying to cap leverage without reference to the liquidity and volatility of the underlying asset class is clumsy.
This issue needs to be looked at in much greater detail. It is unclear who would be the best recipient of this information, it should probably be left to national regulators.

18. AIFD proposals – Issues Depositaries
The AIFD requires Depositaries (most commonly known as ‘custodians’) - and, by extension, sub-custodians - to be EU Credit Institutions as defined under the CRD.
Note: This obligation is stricter than for UCITS
This goes against standard market practice:
many of the largest custodians now operating in the EU are not EU Credit Institutions (nor have an EU Credit Institution in their Group);
currently, custodians appoint sub-custodians of securities in the country in which the issuer of the security is incorporated;
in certain jurisdictions, title to securities must be held by a local sub-custodian;
such restrictions will make it more difficult for an AIF to appoint multiple prime brokers;
hence will lead to concentration of risk

19. AIFD proposals – Issues Depositaries - Liability
The AIFD proposes strict liability on the depositary for loss suffered by the AIFM and investors as a result of the depositary’s failure to perform its obligations.
This liability is not affected by any delegation by the depositary of its responsibilities to sub-custodians.
Note: this is currently stricter than for UCITS
This provision will lead depositaries to reconsider whether they are prepared to act in respect of some funds. Where they decide to act, fees will certainly increase to reflect the greater risk being assumed by the depositary. This cost will be passed on to the end investor.

20. AIFD proposals – Issues Typical master-feeder structure
Non-US investors and US tax-exempt investors
US taxable
investors
Offshore
Corporate
Feeder Fund
Offshore/US
Limited Partnership
Feeder Fund
Offshore Corporate
Master Fund
UK Investment
Manager

21. AIFD proposals – Issues Master-feeder structure
The master-feeder structure was developed in order to accommodate the different tax needs of US taxable and US tax-exempt investors and the need for tax neutral structures.
It serves to minimise costs by removing duplication of investment and complex administrative adjustments.
The structure is widely used by the hedge fund industry.
It is unclear how the structure would be treated under the current provisions of the AIFD – despite the fact it is recognised under UCITS IV.
There would be a substantial costs implication should it become necessary to restructure funds established on a master-feeder basis in order to comply with the AIFD. (Or such funds would simply avoid being within scope of the AIFD.)

22. AIFD proposals – Issues Impact on EU investors
Assuming that an investor is a Professional Investor as defined in MiFID:
Loss of 95% of choice of HFMs (either non-EU managers or non-EU funds)
Loss of access to FoHFs: non-EU AIFMs would not be able to market non-EU funds to FoHFs
Cost of directive-driven restructuring will be picked up by existing investors
Potentially chokes off investment in the EU when it is most needed
ABI/ Eumedion (Dutch pension funds) letter to the European Commission
Other investors are becoming increasingly mobilised and vocal

23. AIFD proposals Legislative process
The proposal was initiated and drafted by the European Commission but has now been passed to:
European Council (AIFM Working Group)
European Parliament (Tripartite – Level 1)
All negotiations now lie with these two bodies under the Swedish Presidency of the EU (1stJuly 09 to 31 December 09).
As per following timetable (overleaf).

24. AIFM proposal - draft timeline: European Parliament and European Council
European Parliament (EP)
Council of the European Union (EU)
1st Reading
1 July: Sweden assumed EU Presidency
3 – 5 Nov: Presentation of draft report by ECON
27 July – 21 Aug:
EP Summer Recess
26 May: European Council working group (Council AIFM WG) meetings commenced. Group is comprised of all EU Member States and chaired by rotating EU Presidency
8 Sept: Council AIFM WG to initiate contact
with Rapporteur
6 July:Council AIFM WG mtg
13 & 27 Oct: Council AIFM WG mtgs
Nov: Consideration of amendments (ECON + JURI)
2 Dec: EU’s Council for Economic Affairs (ECOFIN) to reach
agreement on draft report
29 Sept: Council AIFM WG mtg
16 July: Within EP, ECON committee appointed to lead on AIFMD report; JURI committee to provide an Opinion
2 Sept:
EPP to appoint AIFMD Rapporteur (author of report)
15 Nov: Meeting btwn European Council, EP and Commission
4 - 7 June:
EP elections
29 Sep – 8 Oct: ECON Public Hearing on AIFMD.
Presentation of draft opinion by JURI
17 June: Council AIFM WG mtg
3 & 24 Nov: Council AIFM WG mtgs
21 July:
EPP announced as political group within ECON with responsibility for AIFMD report.
30 Nov – 3 Dec: Vote on draft opinion by JURI
14 – 17 Dec: Vote in plenary – end of 1st reading
May
June
July
Aug
Sept
Oct
Nov
Dec
This slide assumes that the first reading vote in plenary will take place in December, however it is very likely that it will take place in early 2010 instead. If this is the case, the timing stipulated above will differ, although the overall process will remain the same.  24

25. AIFD proposals Legislative process
Co-decision process involving Council of Ministers and Parliament
Both bodies must agree on identical text
A maximum of three readings with potential for amendment at each stage
At that point there is either agreement, in which case the legislative text is adopted, or not

26. AIFD proposals Legislative process
First Reading
Parliament appoints a Standing Committee (the Lead Committee) with responsibility for reviewing, devising and agreeing amendments
Lead Committee prepares a Report to Parliament on the proposed legislation
Lead Committee appoints a Rapporteur who plays an important role in that they determine Parliament’s position and lead negotiations with the Council on Parliament’s behalf
Once the Report is approved by Parliament it is submitted to the Council for review
If the First Reading Report is approved by the Council the proposal is adopted. If not, there is a second reading

27. AIFD proposals Legislative process
Second Reading
Where Council does not approve Parliament’s report it will draft a Common Position and submit it to Parliament
Parliament can approve that position, make amendments to it, or reject it by absolute majority
The Council can either approve amendments proposed by Parliament or reject them
If it rejects them there will be a third reading

28. AIFD proposals Legislative process
Third Reading
A Conciliation Committee comprising 54 members (27 from Parliament and 27 from the Council) is convened with a view to reconciling the positions
It will attempt to adopt a joint text based on the common position and Parliament’s (rejected) amendments
If the Conciliation Committee cannot agree on a joint text or either the Council or Parliament does not approve its joint text then the text is not adopted

29. AIFD proposals Legislative process
Lamfaulssy Process
European approach to development and implementation of financial services legislation
Four levels
Level 1 – framework legislation
Level 2 – implementing measures
Level 3 – facilitation of convergence of regulatory practice by supervisory committees
Level 4 – enforcement of all EU measures

30. AIFD – The Lamfalussy Process

31. AIFD proposals Updates
Rapporteurs Appointed For AIFM Directive (3rd September 2009)
Jean-Paul Gauzès, the European People’s Party’s representative for North Western France, has been appointed as the AIFM directive’s Rapporteur and will guide the directive through the European Parliament. Wolf Klinz (ALDE), Syed Kamall (ECR) and Pascal Canfin (Greens/European Free Alliance) have been appointed as Shadow Rapporteurs. The final Shadow Rapporteur will be appointed shortly.

32. AIFD proposals Updates
Issues Note by the Presidency – 2/09/09
Scope – definition of AIF, exemptions, de minimis thresholds, credit institutions and others managing AIF, double authorisation;
Definitions – management services, marketing, leverage;
Capital – non UCITS IV alignment
Valuation – independence issue
Depositary – risk concentration, liability (“does not seem workable”)
Delegation – non alignment with UCITS and MiFID
Leverage – definition, calculation, mass de-leveraging issues (“appears a bit blunt”)
Obligations regarding controlling influence in companies – conflict with other law
Third country issues – possible restrictions on investment opportunities, barriers to capital flows, fit with global standards
Supervision – non alignment with other directives

33. AIFD proposals Updates
Speech by Mr Mats Odell, Minister for Local Government and Financial Markets, Swedish Presidency (04/09/09)
“……the Directive on Alternative Investment Fund Managers. The proposal is a result of one of the priorities defined by the G20, that is to extend appropriate regulation and oversight to all actors and activities that pose significant risks to the financial system. It is important that the we work together to find a balanced and appropriate solution for the regulation and supervision of managers of hedge funds and other alternative investment funds.”

34. Hedge Fund Regulation United States – Geithner Framework
US Treasury – Framework for Regulatory Reform
Systemic risk
Single regulator for systemically significant firms
Revised capital standards
Registration for private fund (inc. hedge fund) advisers of a certain size
Focus on regulatory reporting, investor disclosure, compliance systems and conflicts and fraud controls
OTC clearing arrangements
Consumer and investor protection
Eliminating gaps in the financial regulatory structure
International co-ordination

35. Hedge Fund Regulation Other Impacting Initiatives
Capital Requirements (stress testing, liquidity)
Offshore jurisdictions
Remuneration
Market initiatives (short selling, limits on commodity trading)
Financial Crime (market abuse, anti corruption)
Review of Product codes by Hong Kong and Singapore regulators