Some of the UK's largest hedge funds could bid Britain farewell unless the draft EU Alternatives Directive is "drastically modified," according to regulatory and consultancy firm Laven Partners.
The proposed Alternative Investment Fund Managers Directive would need the rubber stamp of EU member states and the European Parliament before becoming law, which would likely happen in 2010.
Presently, the directive applies to alternative investment fund managers, with a portfolio topping €100m. A heftier threshold of €500m is proposed for asset managers who do not use leverage and lock-in investors for a five year period.
The European Commission predicts around 30% of EU hedge fund managers, who manage nearly 90% of assets in EU-domiciled hedge funds, would fall into the categories, meaning, fund managers would have to be authorised and regulated, rather than their funds.
Managers would also have to comply with a plethora of risk management, governance and reporting rules.
The FSA and Treasury have vowed they will fight for changes required to keep managers in the country, yet Jerome Lussan, managing director of Laven Partners, says the UK's biggest failure is not introducing laws enabling the establishment of UK-based alternative funds.
"These laws exist in France, Luxembourg and Germany for example, so why not the UK? It would be a great opportunity for Britain to grow- its hedge fund industry, providing jobs and boosting the UK economy," he says.
Florence Lombard, executive director at the Alternative Investment Management Association (AIMA) brands the draft EU Alternatives Directive as "hastily prepared" with provisions which are "impractical and unworkable". She believes measures could unintentionally put thousands of jobs under threat.
"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," she says.
Lussan says: "Managers find the proposed Directive restrictive and to be out of touch with industry realities,"
He thinks the directive would add to MiFID rules, which were only introduced in 2007 and were "poorly implemented".
However, Lussan concedes the directive raises important issues such as disclosure requirements that would improve trust and transparency for investors.
"But to succeed the European Commission must avoid alienating the industry and focus on the practical needs that benefit investors, not politicians," he says.
AIMA says the directive is "not a proportionate regulatory response to any of the identified causes of the current crisis".
Lombard thinks the directive "undermines" findings of the de Larosiere report and Turner Review which concluded hedge funds did not play a significant role in the crisis.
"It also conflicts with the G20's global plan for recovery and reform which calls for regulators and supervisors to "reduce the scope for regulatory arbitrage" and to "resist protectionism," she says.
'We have better oversight'
50th anniversary of moon landing
Technical and behavioural factors
The Value Perspective