As Europe Regulates, Study Shows Pensions Could Be Losers

(October 22, 2009) – According to a recent report by Charles River Associates, European Union (EU) pension funds could be prohibited from investing in upwards of 40% of hedge funds and 35% of private equity funds if proposed regulations are approved.

The draft regulations under review would require greater capital bases and disclosure from all alternative managers who hoped to have European public pensions as limited partners. Critics worry that such regulations potentially could cut European pensions off from foreign hedge and private equity funds that were not in compliance with the directive. Under the draft directive, funds outside the EU could be promoted only within the EU if they complied with similar regulations, and if their country of incorporation had agreements with EU member states regarding the exchange of tax information.

According to the report (prepared for the City of London regulator, the Financial Services Authority), the EU draft directive could cost pensions upward of US$2.1 billion each year. The total cost figure of US$2.1 billion comes from Charles River’s calculations that each fund could expect a 0.05% decline in returns per year based on this imposed “home-region bias.” The draft directive also will impose large one-off costs on alternative managers, the report says.

The directive, first issued in May, is being worked on by EU regulators, with the latest draft expected to be released by the end of the year. The British Government—which collects billions in tax revenues from the hedge fund and private equity industry—has been a vocal opponent of the EU proposal.