Key Takeaways
- • Leverage calculation and reporting methodologies for liquid alternatives lack standardization across regulatory frameworks (AIFMD, UCITS V), creating investor confusion and potential misrepresentation of risk exposure, according to panelists at the ALFI Conference in London.
- • Thomas Nummer (Carne Global Financial Services) and Michael Derwael (Lombard Odier Funds) identified disclosure transparency as essential in principle but "very difficult" to execute correctly in practice, with partial information disclosure risking misleading investors on true leverage positions.
- • Regulatory definitions of leverage and liquidity risk management differ materially across jurisdictions, forcing market participants to navigate conflicting requirements without industry consensus on best practices or reporting standards.
- • Independent risk functions with board-level liquidity risk reporting represent a best-practice approach to managing leverage and liquidity risk, though implementation requires flexibility and institution-specific customization rather than one-size-fits-all solutions.
- • Due diligence processes for liquid alternative products have become increasingly complex, with industry experts emphasizing that rigorous due diligence must precede product selection and investment decisions.
Summary
Panelists at the ALFI Conference in London raised significant concerns about how leverage is calculated, disclosed, and understood within the liquid alternatives industry. Thomas Nummer of Carne Global Financial Services and Michael Derwael of Lombard Odier Funds highlighted a fundamental problem: while transparency around leverage serves legitimate systemic risk objectives, the practical implementation of leverage reporting creates confusion and potential investor misguidance.
The core issue stems from regulatory fragmentation. Different regulatory regimes—notably the Alternative Investment Fund Managers Directive (AIFMD) and UCITS V—employ divergent definitions of leverage, making it difficult for investors to compare leverage metrics across products or accurately assess their true risk exposure. Nummer emphasized that disclosing leverage information is "a great idea but very difficult" to execute correctly, particularly when only partial information is disclosed. Derwael concurred, noting that while regulatory intent is sound from a systemic risk management perspective, "when you get down to the practical details, it can be quite challenging."
Beyond leverage reporting, the panel identified similar tensions around liquidity risk disclosure and management. Derwael noted that regulators are "getting things right at least in the description of things," but acknowledged that no real market consensus exists on how to practically implement liquidity requirements across different market conditions and investor bases. Each market participant must balance regulatory compliance with investor-specific requirements, yet standardized frameworks remain elusive.
On institutional governance, Nummer suggested that establishing liquidity risk management as part of an independent risk function reporting to the board creates a more holistic view of leverage and liquidity risk. However, he emphasized that "flexibility is needed," indicating that rigid, prescriptive approaches may not serve all fund structures effectively.
The panel also flagged due diligence as increasingly critical. Manfred Schraepler of Aquila Capital stressed that thorough due diligence on leverage, liquidity risk, and operational controls should precede all investment decisions, effectively serving as the foundation for responsible alternative fund selection.
The core issue stems from regulatory fragmentation. Different regulatory regimes—notably the Alternative Investment Fund Managers Directive (AIFMD) and UCITS V—employ divergent definitions of leverage, making it difficult for investors to compare leverage metrics across products or accurately assess their true risk exposure. Nummer emphasized that disclosing leverage information is "a great idea but very difficult" to execute correctly, particularly when only partial information is disclosed. Derwael concurred, noting that while regulatory intent is sound from a systemic risk management perspective, "when you get down to the practical details, it can be quite challenging."
Beyond leverage reporting, the panel identified similar tensions around liquidity risk disclosure and management. Derwael noted that regulators are "getting things right at least in the description of things," but acknowledged that no real market consensus exists on how to practically implement liquidity requirements across different market conditions and investor bases. Each market participant must balance regulatory compliance with investor-specific requirements, yet standardized frameworks remain elusive.
On institutional governance, Nummer suggested that establishing liquidity risk management as part of an independent risk function reporting to the board creates a more holistic view of leverage and liquidity risk. However, he emphasized that "flexibility is needed," indicating that rigid, prescriptive approaches may not serve all fund structures effectively.
The panel also flagged due diligence as increasingly critical. Manfred Schraepler of Aquila Capital stressed that thorough due diligence on leverage, liquidity risk, and operational controls should precede all investment decisions, effectively serving as the foundation for responsible alternative fund selection.
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