"This would be a profoundly protectionist move," said Andrew Barker, chief executive of the Alternative Investment Management Association. "The French proposal could be calamitous for European investors who could be prevented from investing in funds or managers outside the EU and non-EU hedge fund managers who would find it very difficult to access the European market."
The change in the French position is understood to have come at the behest of President Nicolas Sarkozy and Christine Lagarde, minister of economic affairs, industry and employment, who want to push through their own text for the Alternative Fund Managers directive (AIFMD). Both have blamed hedge funds for contributing to the severity of the financial crisis.
British officials were last night attempting to gauge support among other EU members for the current text for the legislation, which they believe offers the best compromise between French demands for harsher rules and the UK's desire to protect the industry.
Syed Kamall, the Conservative MEP leading the negotiations for the UK, said French officials were refusing to show him a copy of their new text for the AIFMD and had said they would soon have sufficient support for their proposals to form a blocking minority.
"My best guess at the moment is that they [France] is looking to win others around to their view and then present us with a fait accompli," he said.
If this were be the case, it would set back negotiation on the legislation by several months and undo what until yesterday had looked like a consensus in favour of less extreme measures.
Mr Kamall added that he was playing "a waiting game" to see which member states would come out in favour of the French text, and in particular whether Germany, which had supported the current legislation, would move to back France's harsher rules.
The last-minute upset and in prominent role of Mr Sarkozy and Ms Lagarde will put pressure on Chancellor George Osborne to intervene.
