Survey: EU Rules Would Cost Billions, Cut Returns

Sep 21 2009 | 12:39pm ET

The European Union’s controversial hedge fund regulation proposal could cost the industry a pretty penny, indeed. A new study says that the rules, if adopted, would cost hedge funds and private equity firms as much as €1.9 billion (US$2.8 billion) in its first year alone, and as much as €985 million (US$1.4 billion) every year thereafter.

The survey, by Open Europe, shows that European alternative investment managers expect the rules, which are still being debated and which are likely to be watered down before adoption, to increase compliance costs by one-third.

“Thousands of jobs and millions of pounds in tax revenues could be at stake,” the report warns. “There would be little incentive for fund managers to remain in the EU at all.”

Open Europe estimates that the initial cost of the rules would be between €1.3 billion (US$1.9 billion) and €1.9 billion, with ongoing annual costs of between €689 million (US$1 billion) and €985 million.

The proposed rules would impose strict new reporting and custody requirements on European alternative investment firms, as well as possible leverage limits. The U.S. is also concerned that the rules would shut out non-European firms from doing business in the region. The Open Europe survey indicates some agreement with that fear, predicting an 80% drop in choice of funds for European investors.

The huge new costs and reduction in choice are likely to have another unfriendly result, according to Open Europe: lower returns. The report estimates that private equity returns could fall by between 1% and 2%, with hedge funds taking a much more dramatic fall of between 5% and 10%.

Open Europe surveyed 121 hedge fund managers and 41 private equity firms, with a total of US$550 billion in assets.

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