Industry, British Leader Blast European Hedge Fund Law

Apr 30 2009 | 10:27am ET

Much maligned before they were even released, the European Union’s draft hedge fund law is finding no more love in the cold light of day.

While much of the criticism prior to the delayed unveiling yesterday came from those, especially on the left and in the French and German governments, who believe the rules don’t go far enough, the alternative investments industry is now fighting back, arguing that the rules are unfair and will all but put the hedge fund and private equity industries in Europe out of business.

“This directive is not a proportionate regulatory response to any of the identified causes of the current crisis,” Florence Lombard, executive director of the Alternative Investment Management Association, said. The new rules would impose strict reporting, minimum capital, risk management and accounting requirements on hedge and p.e. fund managers.

“Hastily prepared and without consultation, the directive contains many ill-considered provisions which are impractical and may prove unworkable,” Lombard added. “The unintended consequences of these measures may put thousands of jobs in several major European industries under threat and slow down any economic recovery. Additionally, many of the provisions will disadvantage European hedge fund managers against those outside of Europe, which could prove an incentive for them to move business elsewhere—negatively impacting badly-needed tax revenues for Member States.”

The Hedge Fund Standards Board, a self-regulatory organization set up by some of Europe’s largest hedge funds, also blasted the proposals, calling them a hand-handed attempt by the European Commission to preempt discussion of worldwide regulation. In particular, the group’s head, Anonio Borges, lambasted the leverage provisions.

“Anything more than 1:1 is considered ‘excessive,’” he said. “We find that’s clearly an exaggeration of the risk of leverage. In particular, for private equity, it is something that would virtually destroy the industry.”

Private equity firms, indeed, are no happier with the regulations.

“You’ve ended up with an enforced, hurried document that’s been produced in three or four weeks to deal with a complex issue that will do exactly what everyone doesn’t want, which is to make investing capital in Europe less attractive,” Jonathan Russell, chairman of the European Private Equity and Venture Capital Association, complained to Bloomberg News.

The loudest voices in opposition come, not surprisingly, from London, which has the most to lose if hedge fund and private equity firms hightail it out of the EU: The city is home to some 80% of Europe’s hedge fund assets, and is the second-largest hedge fund center in the world behind New York. The buyout industry has the same concern.

“At its worst, this draft directive could divert private equity out of the EU,” John Cridland of the Confederation of British Industry warned. “Because it is regulating fund managers, there is not good reason why somebody should stay in London if they could move to Switzerland.”

“I have a fear that we are going to see something coming from Europe which leaps on hedge funds and private equity as a source of instability that is not necessarily as well informed as it should be,” the U.K.’s financial services minister, Paul Myners, told a House of Lords Committee yesterday.

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