The main issue raised by the Socialists was that the proposed regulation will only apply to fund managers, rather than to the funds themselves, creating a loophole in the system.
"As it stands now, any funds, be it off-shore or on-shore, would then be allowed to market their products in the EU as well as operate in European markets, in reality without effective regulation or registration," Socialist leaders said in a letter addressed to European Commission President José Manuel Barroso.
The letter was co-signed by Poul Nyrup Rasmussen, president of the European Socialist Party (PES), Martin Schulz, president of the Socialist Group in the European Parliament, and French Socialist MEP Pervenche Berès, who chairs the Parliament's economic committee.
Indeed, the draft text of the Commission proposal, obtained by EurActiv, defines its scope as follows: "This directive shall apply to all managers of alternative investment funds (AIFM) which are providing management services to one or more alternative investment funds (AIF), provided that the AIFM is established in a member state." But there is no mention of direct regulation of funds.
The EU executive will present its final draft next Wednesday (29 April).
A spokesperson for Charlie McCreevy, the EU's internal market commissioner, refused to comment on the draft. However, Commission officials have so far argued that the EU has a wide set of rules which would guarantee legal oversight even if not specifically mentioned in a directive.
Threshold
The Socialists also criticised the draft text for exempting funds from registration if they are smaller than €250 million. "We believe this threshold is too high and would allow too many funds to stay outside the directive," they argue, instead proposing regulation for all funds, regardless of their size.
Another controversial point concerns capital requirements. The Socialists claimed that the text fails to consider these, although the draft explicitly refers to an obligation for "an ongoing capital of at least €125,000" per fund, plus an additional amount for funds that manage portfolios above €250 million.
The Socialists also want to limit the level of leverage possible for alternative funds, which are deemed to take on too much risk, ultimately posing systemic risks. But the Alternative Investment Management Association (AIMA), which represents the hedge fund industry, underlines that the leverage levels of hedge funds in the EU are much lower than those of banks, citing figures from the European Central Bank (ECB).
Talking about a highly-leveraged industry is a "misconception," said AIMA in an statement.
