According to the BBC, new EU rules to regulate bank bonuses – announced on Thursday - will hit Mayfair hard: the onerous restrictions on pay, says Robert Peston, the BBC’s business editor, will apply to hedge funds too:
I have learned that the bonuses paid to senior executives at hedge funds and fund managers are to be subject to strict conditions, under new EU-wide rules that have been agreed by EU members states and legislators.
Under the new rules, agreed by member states and legislators, only 30 per cent of any bonus for bankers and fund managers could be paid straightaway in cash – and the proportion would fall to a fifth for large bonuses.
At least half of the total bonus would have to be payable in shares or securities linked to the resilience of the institution – and much of the bonus would have to be deferred, with individual countries able to decide how much of the payment should be staggered.
Were this the case, it would be fairly disastrous. Worse, really, than the entirety of the much-maligned AIFM directive.
The rules – if applied to hedge funds -would permanently end London’s competitiveness and the biggest centre – ex-Connecticut/New York – for the world’s $2,000bn hedge fund industry.
The BBC is then, going heavily on the story: it featured on the corporation’s flagship Today programme this morning and is on its news website now.
But here’s the rub: it is actually far, far from clear how – in practice – the rules will impact hedge fund managers.
For starters, in a technical sense, the restrictions – applied to alternative asset managers – are in the words of one industry insider, “a nonsense”. Hedge fund managers don’t have “shares”, and it would be economically unworkable for them to issue “securities linked to the resilience of the institution”.
More importantly, though, the entire directive is built around the EU-enshrined principal of proportionality.
Here is the key clause in the directive:
…the principles recognise that credit institutions and investment firms may apply the provisions in different ways according to size, internal organisation, complexity of activities… In particular it may not be proportionate for investment firms to comply with all the principles.
While hedge funds are certainly caught within the ambit of the directive, it will be left up to national regulators to interpret the degree to which it can be enforced upon non-core constituents (i.e. non-credit institutions).
We here at the FT are hearing that the FSA is inclined to apply the strictures to the banks it regulates and will then consult on the degree to which the laws should be applied to asset managers.
The more-than-likely outcome is that hedge funds – even the very largest – would not be caught by restrictions anywhere near as severe as those for banks - if they’re caught at all.
[Update: Sources at the Treasury are also sanguine as to the directive's impact on hedge funds.]
You could always, like Alan Howard, move to Geneva just to be sure, but the chances are, the FSA will point to the far less severe remuneration code in the AIFM directive (assuming it ever gets passed) as a best-practice guide to EU thinking on the matter.
The reasons why that is a good thing are, of course, legion.
The remuneration structure for most hedge fund managers is, after all, already fairly equitable – at least in a technical sense.
While a bank prop trader could make $50m one year, and lose $50m the next, and in both instances collect a sizeable bonus, hedge funds managers only ever get paid out when they’re making money.
Sure, 2and20 might throw up some vast numbers, but only ever when investors are being handsomely rewarded too.
What’s more, most managers re-invest a huge amount of their personal wealth in the funds they manage. Take, for example, John Paulson. Almost all of his vast personal wealth is invested in the Paulson & Co funds’ gold share classes.
But don’t listen to us. This is far more entertaining:
Related links:
Hedge funds hope ‘Volcker rule’ will clip banks’ wings – FT
www.ft.com/hedgefunds