Kinetic Partners, a regulatory consultancy to the UK hedge fund industry, estimates that the proposed EU Directive on Alternative Investment Fund Managers will cost the UK hedge fund industry up to £3 billion (about $4.5 billion) to implement.

The directive will impose additional costs on managers by requiring them to hold additional capital, implement complex new fund reporting and risk management systems, retain independent valuation teams, legal advisors and other professional service providers and put in place extra staff and infrastructure to cope with new disclosure requirements.

Kinetic estimates that the cost of these changes for a typical UK manager will be several million pounds per year. In addition, the hedge fund advisory industry, including administrators, auditors, and risk managers, will have to spend heavily, first to understand and next to comply with the directive.

Kinetic believes the cost to the industry to comply with the proposed directive will be between £2-3 billion in the first year and several hundred million pounds annually thereafter.

Julian Korek, founding member of Kinetic Partners, said: “This ill-considered directive would be disastrous for the UK hedge fund industry, and prove hugely costly to the industry for almost no apparent benefit. This is the European equivalent of the Sarbanes-Oxley Act – a knee-jerk “solution” to non-problems that will hamstring UK-managed hedge funds and prevent them playing an energetic and much-needed role in financing economic recovery. Worse still it is likely to stunt investment in the UK by international funds as they are likely to consider the costs and intrusions disproportionate to the potential upside – further stifling the recovery."