EU plans curbs on hedge fund pay

Published Jun 28, 2012

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London - European regulators published draft rules on Thursday to crack down on excessive bonuses for managers of hedge funds, a sector politicians have blamed for worsening euro zone debt problems.

Policymakers have already clamped down on bankers' bonuses, a move that has proved popular in the wider world where most people's incomes are becoming ever-more squeezed.

The prospect of big bonuses can also encourage employees at financial firms to take excessive risks, regulators say.

The European Securities and Markets Authority (ESMA) said on Thursday such curbs must be extended to managers of alternative investment funds, including hedge funds and private equity and real estate funds.

The rules could have a huge effect on hedge fund managers - the bulk of whose pay is from performance fees - and will apply from the end of this year to senior managers, risk takers and employees whose total package puts them in the same bracket as top management.

Open for consultation until September, the rules bolster a law the EU has approved to force all alternative investment fund managers to obtain authorisation and undergo direct supervision from July next year.

The law was brought in after politicians accused hedge funds of taking bets on falls in banking shares at the height of the 2007-09 global financial crisis, and more recently on drops in euro zone debt prices.

ESMA Chairman Steven Maijoor said the remuneration curbs were in line with those imposed on bankers' pay.

“This consistency will help strengthen the protection of investors and avoid the creation of adverse incentives for those managing alternative investment funds,” he said in a statement.

As with banks, the underlying idea is that only a portion of a bonus can be paid upfront in cash, with the rest deferred or cancelled if the performance rewarded turns out to be illusory.

The draft ESMA guidelines say that before the deferred part of a bonus is paid, employee performance must be reassessed so the sum is properly aligned to “risks and errors” and that 40-60 percent of a bonus should be deferred over several years.

The guidelines also state at least half of any variable pay, both deferred and upfront, should consist of equity-linked instruments related to the fund.

Hedge fund managers are typically paid a relatively small fixed salary and then earn most of their money from lucrative performance fees charged on the assets they manage for clients.

These fees have turned dozens of managers into some of the wealthiest in the financial industry, and attracted scores of traders to leave banks and try their luck at hedge funds, where pay has been under less public scrutiny.

Many hedge fund bosses hold much of their wealth in their own funds. One industry source said this helped ensure their interests were aligned with those of investors because, unlike bankers, they lose money if their funds perform poorly.

Remuneration, whether fixed or variable, includes cash, shares, options, pension contributions, discounts, fringe benefits and special allowances for cars and mobile phones.

A so-called retention bonus will be viewed as variable pay and only allowed if it does not encourage excessive risk taking. - Reuters

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