With a deal in hand to cap bankers' bonuses, Hedge fund managers could be next in line to see further restrictions on their pay if European lawmakers follow through on promises to target the sector's lucrative payouts.
Members of the European Parliament have spoken hopefully of a "snowball" effect that could hit hedge funds, private equity firms and other areas of the financial industry. Udo Bullmann, a German member of the European Parliament who fought for stricter rules, has said the focus will now turn to hedge funds and private equity firms, while Othmar Karas, the Austrian lawmaker who negotiated the pay curbs, is also hoping for similar changes in other areas of finance.
Under the proposed bank compensation rules, bonuses will generally be limited to the amount of a banker's salary. With shareholder approval, bonuses could be as high as twice salary. While hedge fund managers' pay varies wildly, payouts for some of the top earners can dwarf those for bankers.
Unsurprisingly, word of bonus restrictions did not go over well with European hedge funds, which already face new rules requiring between 40% and 60% of bonuses to be deferred. "It would be gross interference if there was a bonus cap in a private industry," one hedge fund executive, who asked to remain anonymous, told Reuters.
Another expressed concern that the bonus restrictions would cover more than simple bonuses.
"The concern would be that they would copy and paste [the bank rules] for hedge funds and would define performance fees as the 'bonus,' which would be most unfair," the executive told Reuters. Others were less concerned.
"Things like this are completely unpoliceable," a hedge fund manager told Reuters. "If you tax people for writing with their left hand, they'll write with their right hand."
Many funds have been complaining of "regulatory fatigue" as they prepare for the arrival of the Alternative Investment Fund Managers Directive (AIFMD) this summer after years of battling with EU regulators - a directive whose rules on pay are far less stringent than the caps on bankers' bonuses.
The AIFMD says 40-60 percent of a hedge fund manager's bonus must be deferred and no more than half can be paid in cash. The rest must be made up of units of their fund or an equivalent. Both are measures that many larger firms already do to some extent. London's hedge fund sector, which accounts for the bulk of the industry in Europe, is waiting for the successor to Britain's Financial Services Authority to publish its response to the directive in April or May.