In Europe, the text of the Alternative Investment Fund Managers directive has been agreed by finance ministers after a long period of lobbying by the industry as well as political posturing driven by public disquiet at the high salaries paid to fund managers.
The directive is now in the European Parliament's hands and, if approved, it will give national regulators and a new pan-European body, the European Securities and Markets Authority, powers to limit the leverage used by funds in the interest of containing systemic risk. The new rules would also require a 'passport' to operate in the EU by 2013 (which is when the directive is likely to be enacted) for funds based in the 27-nation bloc, and by 2015 for all other funds.
The majority of funds managed in London and other parts of the EU are actually based in the Cayman Islands and other offshore centres with favourable tax treatments, which may not meet the requirements.
Although greatly improved from the initial draft of 18 months ago, the toned-down rules still worry the industry because of the heavy compliance burden and the removal of responsibility from national to EU regulators.
Regulatory concerns are being added to the existing pressures posed by the erosion of returns in some cases. Some managers have had to deal with the embarrassing situation of a management fee that is higher than the return on the clients' investments. The days of hedge funds automatically clocking up double-digits returns seem to be over.
On the other side of the Atlantic and at the other end of the regulatory approach, the US Dodd-Frank Act, aimed at the wider financial markets, may benefit the hedge-fund industry by prohibiting investment banks from running proprietary trading operations. These operations had posed the fiercest competition to hedge funds' businesses and this restriction gives the latter a clear run.
In the US the noise about bankers' salaries is as loud as, if not louder than, it is in Europe. How ironic, then, if instead of leaving London for Zurich, hedge fund managers take themselves off to New York.
