CorpComms Magazine

There are not many people who would gladly walk into the eye of a storm, but Christen Thomson did so when he joined The Alternative Investment Management Association (AIMA) as director of communications two years ago.

As the official spokesman for the hedge fund industry, whose worldwide members manage more than three quarters of hedge fund assets, Thomson's role was to promote a sector whose activities many blamed for the virtual collapse of the world's financial markets and the nationalisation of leading high street banks.

Hedge funds became the whipping boy for everything that was deemed wrong with the economy. Hedge fund horsemen of the apocalypse, cried the headline in The Independent. Greedy pig billionaire helped bring HBOS to its knees, proclaimed The Mirror, describing the fund managers as Beasts who can tear firms apart.

Yet just two months ago, AIMA argued successfully against the knee jerk reaction of the EU hedge fund directive (AIFMD), reducing the burden of regulation and also gaining several concessions.

And rather than provoke a media uproar, the AIMA's actions generated new headlines such as We should praise, not punish, the moneymakers in The Times and UK stands up for hedge funds in The Daily Telegraph.

From foe to friend

It is a remarkable turnaround for an industry that, two years ago, was viewed as reckless, feckless and verging on corrupt in the wake of the collapse of Bernie Madoff's Ponzi scheme. Today, even BBC business editor Robert Peston is a supporter. He recently wrote: 'There is a powerful argument - if you believe in capitalism - that hedge funds are in one overwhelmingly important respect a model for how the banking system should be reformed, and absolutely not a financial tumour that needs cutting out.'

The key, according to Thomson, was education. While the media slammed hedge funds for the travails of the financial sector, it became necessary for the industry to abandon its secretive nature and actively explain the role it could (and did) play in the successful functioning of the world's financial markets.

There were high stakes at play. The public and politicians were baying for blood, and demanding that the excesses of what they perceived as a high spending, wheeler dealing industry were curbed, and regulations placed on activities and remuneration.

'We had to educate investors and regulators,' says Thomson. 'We are not talking about the man in the street, though. You could try to change that perception through the broadsheets, but progress is slow. The public are often unable to accept the distinction between bankers and asset managers [the hedge fund industry]. It was largely the behaviour of investment bankers that created the financial crisis, not the asset management sector.'

The media, with its inherent hostility towards the sector, was viewed as the best outlet to educate both the regulators and investors. But the media perceived the hedge fund sector as opaque. 'You can see how the perception grew,' says Thomson. 'I'm a hedge fund manager and I'm asked to respond to a journalist's query. From my point of view, the upside is limited but the downside can be limitless if I say something silly or get misquoted. On a cost benefit analysis, you can see why hedge fund managers didn't speak to the media. But collectively, we did need to communicate a lot more.'

Opening up

An outreach programme to journalists began in December 2008. Within six months, AIMA had talked more to the media than in its 20 year history.

'The crisis was so profound that we had to go out and be proactive and talk to the press,' recalls Thomson. AIMA started a programme of off-the-record briefings with senior industry figures, and established a 'PR war cabinet' comprising directors of communications at various hedge funds 'to coordinate access on behalf of the industry', says Thomson. 'Collectively, we just needed to communicate a lot more. There was a perception that the industry had profited from the crisis when, in fact, it had suffered really badly. We needed to show that the hedge fund industry benefited from financial stability as much as anyone else.'

Hedge fund managers were still loathe to speak 'on the record', but proved to be candid when talking 'off the record' with senior national journalists and editors. The sector started working more closely with its trade press. (These open lines of communication remain active today; during Greece's financial crisis in March, for example, AIMA distributed fact sheets to assist journalists in their understanding of collateralised debt securities.)

'We also started communicating a lot more with our members,' says Thomson. 'We launched a weekly email newsletter. Gradually, our members began to get involved with our programme of education. Very able people started to volunteer to serve on our working groups.' It also launched a newsletter, addressing misconceptions about the industry in simple layman's terms, which was widely distributed to MPs. This was a deliberate strategy. 'We realised that politicians received a tsunami of information about hedge funds that they could not possibly read,' says Thomson. 'We focused on information that was relevant, helped them understand systemic risks and helped them understand what needed to be done to prevent these occurring in the future.'

AIMA started conducting research that would act as the foundation for news stories. 'We would try to distribute primarily research based stories so that they would be picked up widely on international news wires.'

Social role

The research focused on the social role of the hedge fund industry. Initially, the sector had served only high net worth individuals but it had matured and become more sophisticated. Today, two thirds of funds under management are institutional, such as pension funds or university endowments. Institutional funds sought out hedge fund managers because, by their very nature, their strategy is to minimise risks by 'hedging' their investments and deliver positive returns irrespective of the market's direction. Additionally, institutional investors brought the need for better governance to the sector.

'In 20 years, people will look back at investors and say 'They were crazy just buying stocks and shares'. Increasingly, fund managers will look to hedge their portfolios,' says Thomson. 'The hedge fund industry has an important role to play. A key part of our campaign stressed that socially important investors like pension funds were now the leading investors in the industry.' The implicit message was that hedge funds were improving the pension payouts for the ordinary man in the street.

The research found that the European hedge fund industry contributed Eu4 billion in tax revenues, created 50,000 jobs across the continent and managed Eu250 billion in assets. 'We needed to demonstrate the value that the industry provided in each place that it operated,' says Thomson. Four fifths of the jobs were based in the UK.

With the shadow of excessive regulation looming, the hedge fund industry needed to fight back but also not appear to be anticontrol. 'AIMA had always engaged with politicians, but now it needed an active dialogue,' says Thomson. 'The important thing to emphasise was that we, as an industry, supported good regulation. In fact, we welcomed regulation because it kept out the cowboys that gave our industry a bad name. But we wanted that regulation to be well-drafted and practical.'

With the G20 summit scheduled for April 2009 in London, AIMA stole a march by pledging the industry's 'full transparency' to regulators, and announcing its support for mandatory universal registration and supervision of hedge fund managers. When the world leaders later recommended both registration and supervision, the influential hedge fund publication Absolute Return was quick to recognise AIMA's influence.

Poorly constructed directive

But within weeks, the campaign received a setback when the European Commission unveiled its draft Alternative Investment Fund Managers' Directive. This included a draconian plan to make depositaries (the safe-keepers of funds' assets) liable for all asset losses, restrictions on funds' levels of leverage and their ability to market to non-institutional investors, and a three year protectionist clause which prevented non-EU hedge funds operating within the European Union. (This latter aspect prompted a campaign against protectionism.)

'We learned to speak European,' recalls Thomson. 'We learned to put stuff in languages that MEPs got. We proved that the hedge fund industry had a social value. There was a general view that it didn't matter if 'speculators' lost jobs; we proved that there would be an impact on ordinary EU citizens because the values of their pensions would be reduced.

'The AIMFD was commonly thought to be a hedge fund directive, but it also covered real estate funds. Most EU member states do not have hedge funds but they do have real estate investors. We could demonstrate that the draft directive would lead to reduced investment in real estate, which had real consequences on their economies. We took the message to east Europe, for example, Bulgaria and Romania, and explained the consequences of the directive to their economies.'

AIMA was active in engaging with politicians, leading hedge funds and industry figures, prompting a flurry of letters to newspapers and public statements on the ill-conceived nature of the directive.

Valuable information resource

A 'Directive Centre' was launched on AIMA's website, providing a valuable information resource for the media but also acting as a depositary for all statements and articles in support of its anti AIMFD stance. Support came from sources as diverse as the House of Lords EU Committee; the Financial Services Authority and other European regulators; fund managers' trade bodies, as the UK's National Association of Pension Funds and Germany's BVI; politicians, including David Cameron who aired his concerns that the directive was 'a massive land grab' against the UK financial sector, and finance ministers; US senators and congressmen; and influential publications, such as The Economist.

By enlisting their support, AIMA was able to undertake a multi-faceted lobbying programme. For example, Jacques de Larosière, whose High Level Group on Financial Supervision in the EU produced an authoritative report on the current crisis, said that he had 'personal doubts' about the 'wisdom' of the directive. He said that his report did not consider hedge funds a systemic issue and that the directive went 'much further' than his report recommended. AIMA highlighted his views to the media.

Building on its research-based approach, AIMA produced analysis that the directive could cost the European pensions industry Eu25 billion every year - a fact seized upon by leading pension fund trade bodies. Further analysis demonstrated the impact that the directive would have on tax revenues within Europe. Newspapers City AM and The Sunday Telegraph launched campaigns against the directive, while even the Church of England entered the fray.

AIMA kept the pressure on, highlighting new dangers identified within the directive, publicising high level support for its work and industry reports denouncing the wisdom of AIMFD, but from July 2010 - 14 months after publication of the draft - it changed tack, and started to promote the idea of a compromise deal. In October, a compromise AIMFD was announced which most industry participants hailed as a good result for the industry.

'We demonstrated that there was an important role for us to play in promoting new thinking about the value of the hedge fund industry,' says Thomson. 'But there was a bigger point to be made. We wanted to show that hedge funds were not only proud to be part of the asset management industry but that they were actually its future.'

Top five hedge fund myths

1) The hedge fund industry is not regulated and opposes regulation

Hedge fund managers in Europe must be registered and approved by their national regulatory authorities; must agree to maintain appropriate systems and controls; may only market services to a limited number of qualified investors

2) The industry is volatile and dangerous

The primary objective of most hedge funds is to reduce volatility and risk while preserving capital and delivering positive returns under all market conditions

3) The hedge fund industry caused the financial crisis

The main reports into the crisis agree it was a banking sector failure; the role of hedge funds was minimal

4) The industry is based offshore

European hedge fund managers reside onshore and pay corporation and payroll taxes to their national authorities

5) The industry is shady and secretive

The European hedge fund industry shares information about positions and risk exposures with regulatory authorities in the interest of financial stability

Proposed EU alternative investment fund managers' directive

Before AIMA lobbying:

• Three year freeze on all non-EU fund managers accessing EU investors
• Hard leverage caps on individual hedge fund strategies
• Fund custodians ('depositaries') had to be EU banks
• Definition of marketing was very strict, any approach by an investor to a manager would have been deemed marketing
• Strict liability on custodians for losses (which would have been very expensive)
• Would have been almost impossible for managers to delegate functions
• Short-selling provisions included

After AIMA lobbying:

• Freeze is removed - status quo continues in terms of access by non-EU managers to EU investors (private placement regimes), with passport to be introduced at a later date
• Hard leverage caps go - instead the managers sets self-imposed leverage limits
• Custodians no longer limited to EU banks
• Definition of marketing now permits investors to approach managers
• Liability now much less strict (impact will be less costly)
• Now possible for managers to delegate functions
• Short-selling provisions excluded

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