Hedge Funds, Buyout Firms Say EU Rules Are Punitive

Date: Thursday, April 30, 2009
Author: Tom Cahill and Edward Evans, Bloomberg

The European Union’s proposed legislation for hedge funds and private equity firms amounts to a costly attack that may cause thousands of job losses, representatives of the $2 trillion businesses said today.

Buyout firms managing more than 500 million euros ($661 million), companies more than 30 percent-owned by a private equity firm and most hedge funds with more than 100 million euros in assets would be regulated under EU draft legislation proposed in Brussels today.

“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, head of buyouts at 3i Group Plc and Chairman of the European Private Equity and Venture Capital Association, said in a telephone interview today.

Hedge fund managers based in the U.K. are already regulated by the Financial Services Authority, while many also have funds regulated by financial authorities in the countries where the funds are listed, such as Ireland or Luxembourg. Brevan Howard Asset Management LLP, Marshall Wace LLP and BlueCrest Capital Management Ltd., the London-based funds, already have pools that meet standards under the EU’s Undertakings for Collective Investments in Transferable Securities directive.

“Managers have spent a small fortune implementing the previous European Union directives and this appears to nullify them with a totally separate regime,” said Chris Rexworthy, a former FSA executive now advising hedge funds at London-based IMS Consulting. “This will take yet another small fortune to implement.”

‘Swiss Win’

London, home to at least 80 percent of Europe’s estimated $400 billion in hedge fund assets, may be exposed as a result of the changes. The rules follow the U.K. government’s plan to raise taxes on top-earning residents to 50 percent. That had already sparked concerns of managers relocating to places such as Switzerland, which is not part of the European Union.

“At its worst this draft directive could divert private equity outside the EU,” John Cridland, Deputy Director-General of the Confederation of British Industry, told reporters in London today. “Because it is regulating fund managers, there is no good reason why somebody should say in London if they could move to Switzerland.”

“It’s a clear and present danger to the City,” said Andrew Shrimpton, a partner at hedge fund consultancy Kinetic Partners LLP in London, who headed the FSA’s first hedge fund specialist group. “It’s certainly good news for the Swiss and will encourage more money to go to Switzerland. The U.K. needs to set up a war room as fast as possible to try to deal with this.”

‘Not Well Informed’

Britain’s City Minister Paul Myners told a House of Lords committee in Westminster today that he had raised objections to the plans with the commission.

“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,” he said.

“The unintended consequences of these measures may put thousands of jobs in several major European industries under threat and slow down any economic recovery,” Florence Lombard, executive director for the Alternative Investment Management Association, said in an e-mailed statement today.

An estimated 65 hedge funds, each managing more than $1 billion, are based in London, making it the second-largest concentration in the world behind New York, according to data from industry publication Hedge Fund Intelligence.

“I’m happy to see the French and Germans have finally agreed on an EU stimulus plan,” said Philippe Bonnefoy, chairman of the asset allocation of Cedar Partners Investment Management Ltd., a Geneva-based hedge fund manager.

“The proposed regulations will need hundreds if not thousands of very well-qualified regulatory personnel in order to be effective,” he said. “The budget will have to be enormous.”

To contact the reporters on this story: Tom Cahill in London at tcahill@bloomberg.net; Edward Evans in London at eevans3@bloomberg.net