Andrew Baker, chief executive of the Alternative Investment Management Association (AIMA), says that far from reining in the excesses of speculation, as France and Germany seem to hope, the European Commission's Alternative Investment Fund Managers (AIFM) directive could actually threaten jobs and pension returns, and concentrate risk rather than dissipating it

The hedge fund industry finds itself at a crossroads. Post-Lehman Brothers there are a number of regulatory proposals in Europe and the US that have ranged from the eminently sensible to the downright worrying. Firmly in the latter camp sits a significant portion of the European Commission's AIFM directive, which if passed in its current form could, in my opinion, have serious consequences not only for our industry but also the many pension funds and other institutions that generate positive returns by investing in hedge funds.

The G20 leaders' summit in Pittsburgh on 24-25 September 2009 served as a timely reminder of just how out of step the EC had been when it published the draft directive back in the spring. On a number of important subjects, it deviated from the positions agreed in principle by the G20 leaders in London earlier this year. The European Union's unilateralist approach contrasted with the stated aims of the G20 leaders to build a global consensus behind financial regulatory reform - an objective which AIMA, the global hedge fund industry association, firmly supports.

Indeed, we welcome the parts of the EC directive that concur with the G20 position. We announced our support in our 24 February 2009 policy platform for both the disclosure of systemically-relevant information by managers to their supervisors and for all managers to be registered and authorised by their supervisors - two key elements, as it transpired, of the subsequent London G20 summit agreement.

However, despite the best intentions of the Commission, we do not believe that the draft directive will reduce risk and protect investors. Unless the current text is amended, it risks imposing a major burden not only on our part of the EU financial services sector but also significantly limiting the choice available to EU investors, reducing the returns they make. Our own research pegs this possible decline at S25 billion a year for European pension funds.

The directive puts at risk not just the 50,000 or so people employed by the sector in Europe, but the many others whose jobs depend on projects and services financed by hedge funds. What is more, requiring hedge funds to hold assets with banks could actually increase systemic risk because only a handful of financial institutions in the EU would have the sufficient scale and resources to be able to act as depositaries.

During the next few weeks and months, we will continue to work constructively with the EC, the member states and the relevant committees in the European Parliament in our efforts to achieve appropriate revisions to the proposal. We do not underestimate the scale of the task facing us, not least since there are some policymakers in Brussels who would prefer to see the directive strengthened, rather than weakened.

Yet we remain hopeful that common sense will prevail and a compromise can be reached. Sweden, which holds the EU presidency, offered a possible path towards such an outcome in September with a paper which outlined its views on the way forward for the directive. It called for changes in several areas - from the scope of the directive and the definition of funds covered, to calculations of leverage, and the way the new rules would interact with existing regulations. It was a sensible and measured report and gave us cause for guarded optimism.

Ultimately, the European hedge fund industry wants good regulation to strengthen the alternative investment industry and ensure that we maintain our position as an attractive asset class for investors.

• For further information please visit the AIMA website at www.aima.org and visit the European Commission website to track the progress of the directive here

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