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Submission to House of Lords EU Committee inquiry on the European CommissionDirective on Alternative Investments FundSeptember 2009Page 1 of 3

House of Lords EU CommitteeInquiry on the European Commission Directive on Alternative Investments FundManagersResponse from: Church Commissioners, Esmée Fairbairn Foundation, NuffieldFoundation, Paul Hamlyn Foundation, The Henry Smith Charity, and the WellcomeTrust

September 2009

1. As some of the major charitable foundations in the UK, we would like to highlight our concernsabout the potential impact of the proposed EU Directive on Alternative Investment FundManagers. Our combined investment portfolios are worth an approximate £19.5 billion, andtogether we spend in the region of £0.9 billion for public benefit each year. Our fundinginterests range from medical research and education, through to support for the Church’sministry and to address social inequality. We are concerned that the Directive as currentlydrafted will significantly restrict our ability to generate funds to pursue our charitable missionsand thus reduce our impact for public good.2. We welcome the intention behind the Directive – to improve regulations and safeguardinvestors – and we support those provisions of the Directive that aim to ensure greater transparency and expose conflicts of interest. However, we are concerned that someprovisions of the Directive will have significant unintended consequences. The followingissues are of greatest concern to us:3.

Limitation of Choice of managers and funds (Article 35, 38 & 39):

To maximise thereturns on our investments, we must have freedom to select the best investment managersand funds, and to select the investment ideas that best meet our individual needs.4. The Directive as currently drafted will severely restrict our access both to non-EU funds and tonon-EU fund managers. This will impact access to private equity funds and to hedge funds.For example, up to 95 per cent of global hedge funds are currently either not domiciled in theEU or have non-EU managers.

Similarly, many private equity firms are likely to be situated inthe market in which they invest. We believe there is a significant risk that many of the best willstop raising capital in Europe rather than attempting to comply with onerous EU regulations.This will significantly restrict choice for European investors, limit the scope and potential returnof our investment portfolio and hence reduce our charitable spend.

Estimate by the Alternative Investment Management Association, the global hedge fund body

Wellcome Trust response to European Commission Directive on AlternativeInvestments FundSeptember 2009

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Restrictions on access to international assets through limits on depositaries (Article17)

: Diversification of an investment portfolio is a core principle of good portfolio management.A key area where diversification can be obtained is by investing internationally. Such astrategy can produce increased returns while reducing the risk of excessive concentration inparticular countries.6. The draft Directive will require all funds under management to have a depositary that is an EU-authorised credit institution. This will introduce significant barriers to owning internationalassets, and will particularly limit our access to emerging markets. Again, this will reduce thereturns on our investments and therefore reduce our spend for public benefit.7.

Uncertainty on whether investment strategies involving leverage will be permitted(Articles 22-25)

: Many investment strategies employ leverage. From an investor’sperspective, leverage can be a useful tool to adjust the return and risk profiles of a particular investment, and allow the maximum benefit to be obtained by the investor.8. The leverage limits proposed in the draft Directive are not adequately defined. Greater clarification is required, both about the level of the limits and the mechanisms that would beused to enforce them. This lack of clarity is destabilising and makes it likely that certaininvestment strategies will not be made available to European investors. As stated above, weregard this restriction of choice as likely to reduce the returns on our investments and, in turn,to reduce our spend on our charitable purposes.9. We support measures to address systemic risk that arises through excess leverage. It seemsto us, however, that systemic risk can better be addressed through a proposal that deals withleveraged organisations as a group, rather than specifically addressing investment funds.10. In our view, the issues described above should not be dealt with by imposing restrictions,which will have the effect of reducing our freedom to invest in a way that maximises the benefitwe can provide. We advocate that one of the Directive’s existing principles, transparency,should also be the approach here. Professional investors should be provided with proper information about the regulatory regime(s), depositary/custodian arrangements and use of leverage of the funds that they propose to invest in, to enable them to make a judgement onthese issues as part of their investment process.11. We note that the Swedish Presidency has released an Issues Note on 2 September 2009which recognises some, but not all, of these concerns.12. Maximising the returns on our investment portfolios is an essential part of delivering our Foundations’ missions, for the benefit of society. The draft Directive, while well-intentioned,threatens this goal. We encourage the Committee to take into consideration the potentialimpact of the Directive on all European investors as part of its inquiry.