Will hedge funds meet their Waterloo?

Europe's negotiators are now in the very last stages of the marathon negotiations over the directive, which places various controls, rules and standards on the hedge funds and private equity industries.

One of the final bones of contention is a proposed rule that hedge-fund managers based outside the EU (ie in the US or one of the offshore jurisdictions like the Cayman Islands) must conform to EU standards if they want to take money from EU clients. This is the so-called 'passport' and was proposed originally by the European Parliament.

The final text of the AIFM is now under discussion by the Council of Ministers, which is the gathering of national governments and has pretty much the final say on this. Agreement had seemed so close. The Belgians - currently in the Council's rotating chair - had come forth with a characteristic compromise.

Their text would have introduced a passport, but phased it in slowly during the next five years. In the meantime, countries' own existing national rules on investing abroad - known as "private-placement rules" - would have continued to hold sway.

This is apparently what the French have tried to kibosh. According to Ronald Paterson, a partner advising on hedge funds at international law firm Eversheds: "A paper from Christine Lagarde, the French Finance Minister is to be presented at an EC working group in Brussels in an attempt to delay the new regulations."

According to hedge-fund industry sources, this new French text would do away with the EU passport, scrap national private-placement rules, and replace them with a requirement that managers comply with the directive’s full text if they want money from EU investors. Not even the passport currently calls for that.

All this appears to have caught the Council's more compromise-minded delegations on the hop. The hedge funds industry will now be looking to their traditional defenders - the UK and its fellow-travellers - to head the French text off at the pass.

The UK is not without allies. In the past the likes of the Czech Republic, Ireland, Malta, Sweden and - for some reason - Bulgaria have usually lined up alongside on questions such as this - but the negotiators will still have to work hard to build a workable coalition.

As ever in Europe, it mostly depends on what the Germans do. If the French succeed in drawing their traditional EU allies over to their cause, then the game is probably all over. Votes are split roughly - but not precisely - according to each country's population so that the Franco-German axis is a formidable force.

But the Germans' top priority may well be whatever gets this troublesome directive off the negotiating table as quickly as possible. Either way, it is unlikely to come to a formal vote unless and until someone is certain they have a coalition together.

Whatever happens, the French have at least ensured that the battle will go right down to the wire.