Smaller alternative funds complain of European 'passport' costs

By Carolyn Cohn

LONDON, Nov 28 (Reuters) - Hedge fund and real estate fund managers are facing unexpected charges and administrative hurdles to sell their funds across Europe, deterring some from doing so and cutting across the principle of an open market, lawyers and fund managers say.

Europe's directive on Alternative Investment Fund Managers (AIFMD) came into force in July, regulating the managers but enabling them to sell their funds anywhere within the European Economic Area.

Through a "passport", the fund managers register in their home jurisdiction, which arranges authorisation to sell their funds across the region.

But smaller managers say that free movement of services is being hindered by a range of authorisation fees and they are finding it particularly hard to absorb the extra costs and time involved in marketing their funds, putting them off doing so.

"That's against the spirit of a free and open playing field," said Michelle Moran, partner at law firm Ropes & Gray, though she added that it was not against the law.

Austria, for example, charges a fee of at least 1,100 euros ($1,409) for processing documents and an annual fee of 600 euros for monitoring compliance, according to a note from lawyers CMS (HKSE: 0867-OL.HK - news) .

Britain and Hungary, in contrast, do not charge an initial fee, though they require fund managers which set up a local branch to pay "periodic" fees.

Austria's fees were "not high", a spokesman from Austria's FMA regulator said, adding that the annual fee was "hardly a sales obstacle".

The varying fees have come as a surprise to funds used to the existing UCITS passport, which covers retail funds - "undertakings for the collective investment of transferable securities".

"The UCITS passporting fee has been minimal or nil. With AIFMD, the national regulators have adopted more divergent approaches," said Melville Rodrigues, partner at CMS.

Dominic Johnson, CEO of Somerset Capital Management and chairman of the New City Initiative, which represents smaller fund managers, said his firm and others were deterred from marketing in many countries.

Jeff Rupp, director of public affairs at INREV, which represents unlisted real estate funds, has asked the European Securities and Markets Authority (ESMA), to make the fee structure more transparent.

But this is a medium-term goal, with the directive due for review by 2017.

In the short term, Rupp said, "there is very little choice but to pay up."

ESMA did not respond to requests for comment. (1 US dollar=0.7806 euros) (Additional reporting by Michael Shields in Vienna; Editing by Greg Mahlich)