Europe To Impose Bonus Curbs On Hedge Funds

Jun 29 2012 | 12:22pm ET

Regulators are set to fundamentally change the way hedge fund managers in the European Union are paid.

The European Securities and Markets Authority plans to extend bonus restrictions already imposed on banks on hedge funds by the end of this year. Under the plans, hedge funds would be required to defer between 40% and 60% of bonuses over several years, and at least half of bonuses are to be paid in equity-linked instruments related to the fund.

The decision will cause a great deal of grumbling in the European hedge fund industry, most of which is based in the U.K. When bonus curbs were first mooted for hedge funds two years ago, Alternative Investment Management Association CEO Andrew Baker argued that performance fees already align hedge fund managers' interests with his or her clients', and that hedge funds do not pose the systemic risks that banks pose.

But ESMA Chairman Steven Maijoor said that aligning bank and hedge fund pay rules "will help strengthen the protection of investors and avoid the creation of adverse incentives for those managing alternative investment funds."

Under the proposed rules, which are open for comment until Sept. 27, a hedge fund would be able to reduce or cancel the deferred portion of a bonus if "risks and errors" prove his or her one-year success aberrant. If approved, as expected, the bonus curb will come into effect for a hedge fund's highest-paid employees, top management and other staffers with the "most material impact on the risk profile" of a hedge fund.

The new rules would also seek to put strict limits on severance pay.


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