An unhappy hedge fund manager

Some fund managers in Europe could be caught by unexpectedly strict pay curbs when the first EU attempt to regulate the hedge fund and private equity industry becomes a reality next year.

These measures, which if strictly enforced would overhaul the sector’s prevailing pay practices, are included in the Alternative Investment Fund Managers Directive (AIFMD), an EU law that must be enforced by July 2013.

Some investment firms were technically covered by similar remuneration rules when they were introduced for banks last year. However UK guidelines spared almost all investment firms from the most prescriptive curbs.

Hedge funds expected the Financial Services Authority, the UK watchdog, to apply the same principles to AIFMD – sparing them from deferring at least 40 per cent of variable pay for three to five years or inserting clawback provisions for “subdued” performance.

But draft guidance from the European Securities and Markets Authority (Esma) last month included no explicit means for national authorities to exempt categories of funds from the toughest curbs. While the requirements are tailored to firms according to size and risk, the lack of a broad exemption would mean more managers were hit.

Jon Terry – a partner at PwC, the professional services firm – said there was “considerable uncertainty” over rules that could have “a major impact on affected firms. The prospect of clawback is really alien to this industry. And some of the deferral rules would be virtually impossible for many hedge funds,” he said.

The curbs are also potentially problematic for the “carried interest” model used in private equity.

Regulation of pay is an extremely sensitive topic for the freewheeling hedge fund industry, which has long awarded its members sums far in excess of those found elsewhere in finance.

Source: Financial Times