HEDGE FUND and private equity fund managers could face new restrictions on pay under proposals to be unveiled this week as European Union countries work on amending legislation that would regulate the alternative investment fund industry.

Swedish diplomats confirmed last night they would attach an annex dealing with remuneration of hedge fund and private equity fund managers when the latest summary of suggested amendments to the draft legislation was made public. They said their pay proposals would be based on Financial Stability Board principles and be comparable to the proposed constraints on bankers’ pay, which are also being pursued at EU level through changes to the capital requirements directive.

The proposed rules for banks and investment companies require them to have remuneration policies consistent with effective risk management, such as deferring bonuses over several years.

The Alternative Investment Management Association (AIMA) cautioned against “applying formulas on banking remuneration to the asset management industry”.

It said the industry differed from banking in two key respects.

“First, hedge fund managers receive performance fees which are structured as a percentage of the value they add to the investments they manage . . . Hedge fund managers earn their fees only if they are successful,” it said.

Second, “much of the concern expressed on banking bonuses relates to the fact that many banks have been bailed out by governments around the world. There is no single hedge fund . . . that has been either bailed out or received a handout.” – Copyright The Financial Times Limited 2009