One of the points that investors sometimes miss about hedge funds is that some countries impose strict regulations on the trading of these funds, while others have few if any regulations in place. This can sometimes open the door for the opportunity to invest in a hedge fund that includes provisions that could be to the detriment of the investor. As hedge funds have come to be more prominent in more markets and as they are not always domestic in nature, the need to implement at least some laws and regulations regarding their trading and management has become more desirable. This is especially true in Europe and particularly within countries that are members of the European Union.

During 2010, what is known as the Directive on Alternative Investment Fund Managers was considered and finally approved. Most of the countries that are part of the EU have chosen to support the directive. One of the provisions included in this measure is the necessity for hedge funds to be properly registered in each state in which the fund is traded. Along with registration, the terms of the directive also require enhanced disclosure requirements that are significantly more detailed than previously. One additional measure was to increase the minimum capital requirements for participation in registered funds, which also goes a long way to ensuring that investors who can ill afford to invest in hedge funds are excluded. While these provisions are not expected to be officially implemented until 2013, many of the member nations have already taken steps to set policies and procedures in place that honour these terms.

The impact of the AIFM directive is also having an influence outside of the EU. Leaders of countries in Europe that are not members of the EU have looked at the provisions and in some cases found them helpful in crafting additional regulations to protect investors based within their borders, which in turn means protecting national economies.

Thanks to these pending hedge fund regulations, some funds are already being moved from offshore locations into nations that have committed to observing the directive and have begun the process of implementing procedures to comply with the new regulations. An example is Jupiter Asset Management, which has decided to bring its Europa hedge fund to Luxembourg and merge it with a sub-fund that is part of Jupiter’s Luxembourg Sicav. Doing so will provide the benefit of being in full compliance with the EU’s directive, which is anticipated to help keep interest in the fund high.

While there is some anticipation that implementation of all measures approved by the European Union will take time and may involve the need to work through a number of challenges, the measures are generally seen as being beneficial to investors, as well as to the funds themselves. Some opposition has been voiced, not necessarily regarding the need for tighter regulation, but to the specifics agreed on by leaders and representatives in the EU. Without a doubt, governments in many other countries around the world will be watching the implementation closely, possibly with an eye to creating some new regulatory measures of their own, after learning what does and does not work in the EU.