EU steps a vote closer to crackdown on hedge funds

NEW legislation cracking down on hedge funds and other "alternative" investments came a step closer yesterday as EU finance ministers backed curbs on the industry in the wake of the global financial crisis.

Chancellor George Osborne opposed some of the rules but was largely voted down in his first trip to Brussels in his new Cabinet role. However, he did win a concession for the EU to consider Europe-wide operating rights for City funds in return for more transparency.

The government opposes part of the package, which ministers argue puts London's hedge fund industry at risk. The UK is home to 80 per cent of Europe's hedge funds, but there are also concerns that the rules will cause hardships for pension funds and more traditional investment trusts.

Yesterday, Ecofin, the council made up of finance ministers from the 27 member states, approved the Alternative Investment Fund Managers (AIFM) directive which is set to be voted on in July.

The UK fears it will lose out disproportionately from stricter rules that include reduced leverage and greater disclosure of portfolios.

Rules to restrict "third country" fund managers have also proven highly contentious, with US treasury secretary Timothy Geithner arguing this could disadvantage American firms.

Owen Kelly, chief executive of Scottish Financial Enterprise, warned this was "just the beginning" of tighter regulations affecting the financial services sector. He argued the directive would mean higher costs for consumers and companies that received investment from private equity vehicles.

"The single biggest thing that concerns the Scottish industry is the impact of it on individual investors and pension holders," Kelly said. "Costs will rise and the ability to see a decent return from your investments could be diminished.

"It could also diminish the availability of capital through private equity and hedge funds and through other investment vehicles just when that capital needs to get to the market quickly."