Hedge fund managers may be told to justify their pay and prove it does not encourage excessive risk-taking, according to a document that could be a cornerstone of new European Union rules for the industry.
The EU is scrutinising a raft of regulations for hedge funds and other niche financial organisations that includes imposing tough borrowing limits on the secretive industry, which has provoked increasing suspicion among politicians.
Reuters obtained the draft law, which outlines a pay code for hedge funds that discourages golden-handcuff payouts to retain high-fliers and demands that more than 40 percent of bonus payouts be deferred for at least three years.
The pay code, which is similar to that proposed for bankers, also demands a balance between the amount hedge funds or private equity managers get paid in salary and bonus.
It makes a new pan-European watchdog for markets - due to be set up in an overhaul of financial supervision - responsible for the pay guidelines for the fund managers best known for making reverse bets on company stocks rising or falling.
"Member states shall require Alternative Investment Fund Managers to have remuneration policies ... that do not encourage excessive risk-taking," officials write in the draft, which is the result of weeks of talks between European countries.
Although the funds, which one politician dubbed locusts, did not play a central role in the financial crisis, long-standing suspicion of the industry prompted the EU's executive European Commission to draft rules to keep close tabs on it.
Since the crisis, there has been a drive towards a broad clampdown on financial services.
The G20 group of leading countries, which includes the European Commission and several EU states, agreed to guidelines on banker pay that are similar to the ones for hedge funds.
The Alternative Investment Management Association, a hedge fund lobby, has warned against wider application of bank pay curbs, saying that unlike the banking industry, no hedge fund was bailed out by any government.
Reuters