Asian Hedge Funds May Be Hurt by EU Rules, AIMA's Baker Says
The European draft rule to tighten hedge-fund regulations may hurt the industry in Asia as managers lose access to investors in the Europe Union, said Andrew Baker, who helms the industry’s largest trade group.
The European Parliament’s economic and monetary affairs committee approved this week a measure to force hedge-fund managers outside the EU to agree to transparency standards in exchange for marketing access to investors in the bloc.
“The whole industry, whether it’s direct or indirect, may suffer a negative impact,” Baker, the London-based chief executive officer of the Alternative Investment Management Association, said in an interview in Singapore today. New restrictions in Europe mean “there may be barriers raised between the regions which will prevent one region taking advantage of capital flows from another region,” he said.
Hedge funds and private equity firms are under the scrutiny of lawmakers worldwide, who say they are partly to blame for the financial crisis. Regulatory proposals under consideration globally may cut the asset management industry’s profit margins by half, said a study by International Business Machines Corp.’s consulting arm.
The number of hedge funds overseen by managers licensed by the Securities and Futures Commission in Hong Kong, the largest Asian hedge fund center, grew to 542, nearly five times the 2004 number, according to a September report from the regulator. Singapore’s hedge-fund industry has grown from near zero in 1997 to 138 single-strategy managers employing over 800 professionals, according to a survey by the AIMA.
Managers in Asia who rely on service providers and other facilities within the industry that are based elsewhere may also be “in flux” because of “business-model changes” brought about by the draft law, known as the Alternative Investment Fund Managers Directive, Baker said.
The Group of 20 Nations last year agreed to tighter fund oversight. The U.S., U.K. and business groups have challenged the proposals, saying they could hurt companies owned by private-equity firms and restrict funds’ use of debt. A report commissioned by the U.K.’s Financial Services Authority said the EU laws would cost companies 4.6 billion pounds ($6.9 billion).
U.S. Treasury Secretary Timothy F. Geithner sent a letter to EU Financial Services Commissioner Michel Barnier in March raising concerns the draft law may discriminate against U.S. funds. The law, proposed last year by the European Commission, would restrict funds’ use of debt and limit bonuses.
The proposals could risk retaliatory action by governments, Baker said.
“At a time when we talk about maintaining cooperation and global capital flows, the integrity of global trade flows, a measure of which goes in the opposite direction runs the risk of derailing cooperation,” Baker said.
The full EU parliament is due in July to give its verdict on the draft legislation. Final EU approval of any measures requires an accord between the parliament and EU national governments in a process that could take another year or more.
“Everyone is watching this very closely and they want a proportionate outcome which maintains investor choice,” said Baker, who had met managers in Hong Kong, Japan, Singapore, Europe, the U.S. and Canada recently.