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EU regulates hedge funds and other alternative funds

European Commission, after long-term reluctance to intervene in this sector of financial markets, finally presented a proposal for a Directive on managers of alternative investment funds at the end of April. The draft applies to all funds not covered by Directive 85/611 (the so-called UCITS Directive) and encompasses hedge funds, so-called private equity funds, commodities and real estate funds and special funds for professional investors.

However, the proposal counts on a concrete minimum amount of assets managed and thus regulates, for example, hedge funds if they dispose with assets of 100 million € and more. In case of private capital funds the limit should be 500 mil. €.

The aim of the proposal is to subject the said funds to registration and oversight of national regulatory authorities, primarily through their managers. They will be obliged to apply for a license and comply with the standards of management (corporate governance), to develop a risk management system and meet the requirements of capital adequacy. There are important new obligations to provide information that will affect not only supervision and investors, but also the public. 

The proposal is perceived as very controversial. Proponents who believe hedge funds played a significant role in the current financial crisis consider the extent of the proposal to be insufficient. On the other hand a number of financiers and politicians have harshly criticized it as unreasonable and unnecessary. The Commission currently expects the Directive to be approved by July of next year and implementation by Member States should therefore take place in June 2012.

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