EU Plans Would Limit Investors to 40% of Hedge Funds, FSA Says

Date: Thursday, January 28, 2010
Author: Caroline Binham, Bloomberg

As many as 40 percent of the world’s hedge funds won’t have access to European Union investors if EU plans to oversee funds and private equity are passed in their current form, an official at Britain’s regulator said.

Investors from the 27 member-state bloc won’t be able to access 40 percent of hedge funds and 35 percent of private equity firms under EU proposals because of so-called equivalence requirements, a Financial Services Authority official said, citing a report. The requirements test whether countries where funds are based have similar tax and legislation to the EU.

“It would drive legitimate business models offshore,” said Dan Waters, the FSA’s asset-management sector leader, in a speech in London published yesterday. “It cannot be a sensible outcome from the directive that investor protection is delivered at the expense of the protection of financial stability.”

Hedge funds and private equity firms are under scrutiny of regulators and lawmakers worldwide, who say they are partly to blame for the worst financial crisis in a generation. Funds won’t be able to get investment from U.S. banks, under proposals announced last week by President Barack Obama.

The EU’s Directive on Alternative Investment Fund Managers is currently being debated, with the European Parliament scheduled to vote on a final draft this year. The FSA in 2009 commissioned the independent report cited by Waters. It found that the proposed rules will cost hedge funds and private equity firms at least 4.6 billion pounds ($7.4 billion).

The U.K. is home to 80 percent of Europe’s hedge fund management industry and 60 percent of private equity, Waters said. The FSA already regulates individual fund managers. Poul Nyrup Rasmussen, the Danish former prime minister who first proposed the directive, called the 120-page report biased when it was published in October.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net