Hedge fund fury over more EU pay curbs

Date: Friday, July 2, 2010
Author: James Moore, The Independent

Hedge fund managers face curbs on pay after they were caught in an EU-wide clampdown on bankers bonuses.

Under a deal agreed with the European Parliament, bankers will be able to receive no more than 30 per cent of any bonus immediately and in cash – which is reduced to 20 per cent for larger bonuses. The remainder must be delayed and linked to long-term performance, with 50 per cent paid in shares.

Bankers are relatively relaxed about the new rules, because they don't go further than restrictions already agreed with the Financial Services Authority. And the new rules do not contain restrictions on the total size of bonus payments which will mean seven-figure payments will still likely be made.

But hedge funds, which will be caught by the new rules, are furious, arguing that they had little to do with the financial crisis. Their activities have already faced curbs under other directives and they argue that their methods of paying top managers are different.

Stuart Fraser, policy chairman at the City of London Corporation, said: "I am deeply concerned about the potential for hedge funds and asset managers – who have repeatedly been found to have played little or no role in the global financial crisis – to be caught up in this legislation and overwhelmed with the red tape that it entails.

"This may not be a big issue for the rest of the EU but it certainly is for the UK. London is home to 80 per cent of the EU's hedge fund industry: a highly mobile industry that is already deeply concerned about recent and, indeed, future taxation and regulation coming out of both the UK and the EU." Mr Fraser warns that the rules – combined with the controversial Alternative Investment Funds directive – could be the "straw that breaks the camel's back" that pushes them to move to non-EU jurisdictions.

The Alternative Investment Management Association declined to comment. However, it has previously said it fears moves to clamp down on hedge fund pay "treats hedge fund manager performance fees in a similar way to banking bonuses when they are, in fact, completely different".

Hedge funds argue that it would be illogical to pay bonuses in shares, as with bankers, because most are not listed on the stock market. Instead, they take a cut of any outperformance in their funds and pass a substantial chunk of this on to their managers. One industry source said: "That doesn't motivate people to take short-term risks, as in banking. Quite the reverse because it rewards long-term performance."