The European Union is considering imposing tough new measures to curb the pay of private equity and hedge fund managers in a further clampdown on the sector.
The proposals form part of an amendment put forward by the Swedish Council to the EU's Alternative Investment Fund Managers Directive (AIFD), which could result in managers being forced to defer up to 60% of their annul pay.
Draft documents include plans to spread 40% of managers' remuneration over three years and to defer up to 60% of remuneration in cases where variable pay is very high.
But there are fears that the proposal could force the sector, which is mainly based in London, into exile.
According to reports, BlueCrest Capital, one of the UK's largest hedge funds, has already announced it is moving a large part of its operations to Geneva owing to concerns over the new regulations.
Some industry figures argue the sector is being unfairly caught up in the public backlash against the bonus culture in the banking sector which contributed to the financial crisis.
But Guy Rainbird, public affairs director at the Association of Investment Companies (AIC), thinks pay and incentives are critical issues for policy makers and need to be examined.
"I am not surprised this area is being looked at as it is a universal issue and is central to the political debate over financial reform. There are issues in terms of inappropriate incentives, but the EU must be careful that a blunt instrument is not used to resolve the difficulty."
He adds hedge funds and private equity groups are not necessarily being unfairly singled out.
"This could just be the start - it could be applied to all types of investment activity."
The AIFD, due to come into force in 2012, sets out a regulatory blueprint for alternative investment funds and aims to minimise the risks associated predominantly with highly leveraged hedge funds. Its proposed regulations include imposing tough borrowing limits for the sector.
However, the AIC believes the directive is fundamentally flawed because its plan to cap the amount funds can borrow will actually increase risk, thereby defeating its purpose.
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