Actually, the European Union IS going to hammer hedge fund pay

Unfortunately for hedge fund managers, it is slowly emerging that their pay may well be regulated under the European Union's new compensation rules after all. And if hedge fund pay isn't hit by these rules, it will almost certainly be hit by the Alternative Investment Fund Managers Directive.

MiFID is the key

A spokesman for Arlene McCarthy, the Labour MEP driving the new compensation rules, says they're not intended to cover hedge funds. However, he points out that the new rules will apply to funds regulated under the Markets in Financial Instruments Directive (MiFID).

John Godden, managing director of hedge fund consultancy IGS Group, says pretty much every hedge fund in the UK operates under MiFID, and that pretty much every hedge fund will therefore be impacted.

However, Jonathan de Lance-Holmes, a partner in the investment management group at Linklaters, says it will be possible for hedge funds to sidestep the new rules by exploiting a loophole in MiFID and classifying themselves as, 'managers of a collective investment scheme.'

"You don't need a MiFID licence for activities you perform in that capacity," he says.

There is no escape

It may not be worth hedge funds' while to reclassify themselves, however. A final vote on the Alternative Investment Fund Managers Directive is expected in September. This is expected to restrict pay at all funds managing more than €100m.

"We want hedge fund pay to be restricted in exactly the same way as banking pay," says Jean Paul Gauzes, the European MEP pushing the AIFMD. "We're confident that this will happen. There is a lot of support for it."

Those restrictions, outlined in so-called 'Annex II' of the AIFMD will mean that 40% of hedge fund compensation has to be deferred. Mandatory deferrals will increase to 60% of hedge fund compensation of a, 'particularly high amount.'

"There is no future for non-deferred compensation at hedge funds," says de Lance-Holmes.

Godden argues that the new rules won't make any difference because senior hedge fund managers are partners who don't get bonuses and take partnership profits instead.

However, Lance-Holmes says sidestepping them won't be that easy. "The new rules will refer to broad remuneration. Are they going to say that they don't include partnership profits for people who are partners in an LLP? Not a chance."