British Hedge Funds Say Bonus Rules Shouldn’t Apply

Sep 15 2010 | 2:48am ET

British hedge funds are fighting back against a proposal that could drastically change the way hedge fund managers are paid. Industry lobby the Alternative Investment Management Association was set to meet yesterday with the U.K. Financial Services Authority to press their case that hedge funds should not be subject to the bonus restrictions mandated by the European Union.

The FSA in July announced that strict bonus rules approved by the EU would be extended from its 27 largest lenders to more than 2,500 firms, including hedge funds. Under those rules, at least half of any variable compensation must be paid in shares or some equivalent non-cash instruments starting in January. In addition, at least 40% of bonuses will have to be paid out over three years; if the bonus exceeds £500,000, 60% must be deferred.

But AIMA argues that imposing those rules on hedge funds would be unfair and would not further the goals of the rules.

“Remuneration in the hedge fund sector does not encourage the reckless and short-term behavior the ‘bonus culture’ has created elsewhere—quite the opposite,” CEO Andrew Baker said. “Performance fees help to align the interests of manager and investor. And they do not reward failure, which was another criticism of the ‘bonus culture’ at large financial institutions.”

What’s more, AIMA says hedge funds should be exempted because the FSA itself has ruled that no hedge fund poses a systemic risk to the economy.

The FSA is in consultations on how to implement the EU rules until Oct. 8. The regulator said it was looking into imposing them “proportionally,” depending on the size of the firm.

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