HONG KONG: The European Commission's attempt to regulate hedge-fund transactions will make it difficult for Hong Kong-based fund managers to access European investors and impede the growth of alternative investment funds in Hong Kong, Alternative Investment Management Association (AIMA) said yesterday.

Hedge-fund investment from European investors currently amounts to $15 billion, accounting for 50 percent of the total hedge-fund investment volume in Hong Kong. The association said the new directive will hamper European investors' efforts to purchase Hong Kong hedge-funds.

Under the draft directive, investment managers based outside Europe will need to obtain a passport, which will not be available for three years after the regulation is introduced, to gain access to European investors.

"In practice, this will make it extremely difficult to acquire the requisite passport, requiring managers to either establish themselves in Europe or look elsewhere for investors," Chairman of AIMA Hong Kong Christophe Lee said yesterday. AIMA is an international trade body for the hedge-fund industry.

To obtain a passport, applicants should demonstrate a regulatory equivalence between Europe and their home jurisdiction. Other key criteria include equivalent prudential legislation, equal access to markets and a tax information-sharing agreement.

For this to be satisfied, regulations in Hong Kong will need to be changed in ways that go beyond discussions in international regulatory forums, including implementation of capital requirements and leverage restrictions, the London-based AIMA said.

Hong Kong-based investment managers will also have to appoint a European credit institution as a depository, placing cost and regulatory barriers to accessing significant sources of funds in Europe.

At present, European fund managers will delegate their Asian portion of investment to Asian sub-managers. The new proposals may also hinder this designation of investment.

"In sum this will significantly detract from the growth of the local alternative investment management industry," Lee said.

He added that European investors usually have better returns when they invest Asian funds in Asia. The draft directive may, therefore, decrease the ROI, as it restrains investment outside Europe.

By the end of December 2008, Hong Kong ranked as the largest hedge-fund center in Asia, with hedge-fund assets amounting to $22 billion. The city also had 245 hedge fund managers, compared to 150 in Singapore and 145 in Australia.

Dragged down by the global financial crisis, Asia-Pacific hedge-fund startups slumped 35 percent to 75 last year.

In contrast, Hong Kong was the only major hedge-fund center to have more startups than closures.

(HK Edition 07/31/2009 page3)