LONDON, March 5 Hedge fund managers could be next in line after bankers to see further restrictions on their pay if European lawmakers follow through on promises to target the sector's lucrative payouts.
After reaching a deal in the early hours of Feb. 28 to cap bank bonuses at the same size as base salaries, or twice basic if backed by shareholders, some politicians are now talking about a "snowball" effect embracing other areas of finance.
Udo Bullmann, a German member of the European Parliament who fought for stricter rules, has said the focus will now turn to hedge funds and private equity firms, while Othmar Karas, the Austrian lawmaker who negotiated the pay curbs, is also hoping for similar changes in other areas of finance.
But in a sector that has been trying to distinguish itself from the "pariah" status of banking since the financial crisis to and emphasise it does not have the same systemic importance, some are unhappy about the prospect of fresh regulation.
"It would be gross interference if there was a bonus cap in a private industry," said a senior executive at a major hedge fund firm, speaking on condition of anonymity.
While hedge fund managers' pay varies wildly, payouts for some of the top earners can dwarf those for bankers.
David Harding, the founder of Winton Capital, has amassed a net worth of 800 million pounds ($1.2 billion), having received more than 348 million pounds in dividends and salaries since 2006, including 84 million pounds in 2011, according to the Sunday Times Rich List. Brevan Howard co-founder Alan Howard has built up a net worth of 1.4 billion pounds.
Many funds have been complaining of "regulatory fatigue" as they prepare for the arrival of the Alternative Investment Fund Managers Directive (AIFMD) this summer after years of battling with EU regulators - a directive whose rules on pay are far less stringent than the caps on bankers' bonuses.
"The concern would be that they would copy and paste this for hedge funds and would define performance fees as the 'bonus', which would be most unfair," said one executive.
The AIFMD says 40-60 percent of a hedge fund manager's bonus must be deferred and no more than half can be paid in cash. The rest must be made up of units of their fund or an equivalent. Both are measures that many larger firms already do to some extent.
London's hedge fund sector, which accounts for the bulk of the industry in Europe, is waiting for the successor to Britain's Financial Services Authority to publish its response to the directive in April or May.
Hedge funds' bumper fee structures - typically a 2 percent management fee and 20 percent of performance, but sometimes much more - have made the industry an easy target for politicians tapping into popular resentment of money men in the aftermath of the financial crisis.
Hedge funds say performance fees are not like bankers' bonuses because they are only earned when a manager increases the value of the fund. Critics say a manager pockets performance fees in the good years but doesn't give them back when a fund loses money the next, though many funds now do let investors claw back performance fees if fund value falls.
But with further hedge fund pay curbs still at the stage of talk rather than action, there is unlikely to be an immediate impact on London's hedge fund industry. The European parliament's timetable and elections next year mean it might not even get round to debating any proposals until 2015.
And few hedge fund managers are yet giving it much thought; a senior executive at one of Europe's biggest hedge fund firms told Reuters that the topic had not come up in internal management discussions.
There also seems little early suggestion that new rules would prompt an exodus from London. Alternative destinations such as Monaco or Switzerland would offer little benefit, since industry insiders expect managers outside the EU to be subject to AIFMD guidelines if they sell into the EU.
Brevan Howard, which moved its main office to Geneva, has been hunting for a new home in London amid signs some traders miss the city's nightlife.
Some predict that new curbs will in any case be impossible to enforce.
"Things like this are completely unpoliceable," said one senior hedge fund manager, who predicted that capping bonuses would have no effect on London's hedge fund sector and that firms would find ways around any new pay curbs.
"If you tax people for writing with their left hand, they'll write with their right hand," he said.