Europe Could Impose Pay Restrictions on Hedge Funds

Just when it looked like hedge funds would dodge the worst of the European Union’s proposed alternative investments rules, Brussels has whipped up another bitter pill.

The European Council and European Parliament, which are reviewing the proposed legislation, have decided to impose their proposed rules for banking compensation on hedge funds and private equity firms.

Under the banking pay rules, which are also currently being debated, 40% of bonuses would have to be deferred for at least three years, and a “substantial” amount would have to come in the form of shares. Mats Odell, the financial markets minister of current EU president Sweden, said the alternative investments pay rules “will be very close” to the banking rules.

That news did not sit well with the hedge fund industry. Antonio Borges of the Hedge Fund Standards Board, the industry self-regulatory organization, called the pay proposals “inappropriate because the compensation scheme in banks raises a whole series of issues that do not apply to hedge funds.”

Florence Lombard, executive director of industry lobby the Alternative Investment Management Association, said applying the banking rules to hedge funds doesn’t make sense, because unlike banks, “there is no single hedge fund in the world that has either been bailed out or received a handout.”

Comments

[Mad Hedge F...:]

vhi The hedge fund industry is still emerging from the ashes of 2008, but will inevitably grab a larger share of the investing public’s assets. Low interest rates and hero status made it way too easy for inexperienced, untested, and sometimes unscrupulous managers to raise new funds that charged management fees as high as 3%, with a 50% performance bonus. Behind every “liar loan” was a bond manager happy to soak it up through securitized Fannie Mae (FNM), Freddie Mac (FRE), or bank debt, shorting Treasuries against them, and then leveraging the 40 basis point spread 50 times to generate a highly marketable 20% annual gross return. Never mind the risks. It was easy money, as long as there were lots of liars- which mortgage brokers herded in by droves, and as long as spreads narrowed-which they did for most of the 21st century. By the beginning of 2008, assets under management soared to $2 trillion. The melt down that followed wiped out large numbers of funds, and raised gates for the survivors, making investors wonder if they would ever get their money back. Total assets plunged to $1 trillion in the blink of an eye through a combination of redemptions and market losses. The new era that is emerging will be populated with humbled and chastened managers offering more disclosure, lower fees, no gates, and thanks to Madoff, oodles of third party oversight. Their portfolios will have less leverage, be invested in more liquid securities, and bring in lower returns. But the new generation will also offer investors battle tested strategies that survived the 100 year flood. Bridgewater, with $37 billion in assets, is now the largest hedge fund, followed by JP Morgan with $36 billion, Paulson & Co. at $27 billion, DE Shaw showing $26 billion, and Soros still at a hefty $24 billion. Long track records and a Gucci cachet will assure that these will prosper. Fees will settle down to the 1%/20% range. For the rest of us this means more capital bunching up in the most successful trades, as we have already seen this year in financials, China, oil, copper, and the multitude of short dollar plays. It is also going to be much harder to get new fund launches off the ground.

Nov 12 03:10 PM

[OstrichHater:]

this is just political grand standing. they cant impose those rules on all hedge funds -- maybe large systemically risky ones, but there are thousands of others that will always fly under the radar.

Nov 12 09:19 PM