Almost universal condemnation from the hedge fund community greeted the announcement of the European Commission's draft directive on alternative investment fund managers.

The draft directive for alternative investment fund managers from Internal Market Commissioner Charlie McCreevy has raised a storm of protest. Although a full draft has not yet been published, concern was raised from an early morning press conference and release of a frequently asked questions sheet outlining the EU's intentions towards the hedge fund industry.

"This directive undermines the findings of these reports and the vast amount of work that is currently being undertaken by the G20, Iosco and the Financial Stability Board," commented Florence Lombard, Alternative Investment Management Association (Aima) executive director. "It also conflicts with the G20's global plan for recovery and reform which calls for regulators and supervisors to 'reduce the scope for regulatory arbitrage' and to 'resist protectionism'," she added.

Many were surprised the EU had so blatantly set aside the intentions expressed at the April Group of 20 London summit to work together through organisations like the Financial Stability Board, Iosco and with Aima to implement co-ordinated regulation and oversight of the hedge funds industry.

The Aima statement, which followed a scathing criticism of a previous version of the draft directive only a few days ago, said the new draft "contains many ill-considered provisions which are impractical and may prove unworkable. The unintended consequences of these measures may put thousands of jobs in several major European industries under threat and slow down any economic recovery."

Many of the provisions, said Aima, will disadvantage European hedge fund managers compared with those outside the EU. This, said the organisation, "could prove an incentive for them to move business elsewhere".

"We understand the great deal of political pressure facing the commission. However, it is the commission's role to propose necessary, unbiased and effective legislation. This directive is punitive and falls far short of this goal. It also does not recognise or take into account the existing progressive and effective regulatory framework in some EU states," Lombard concluded.

Simmons & Simmons law firm in London said the directive was "a blatant attack on the UK asset management industry" and was clearly protectionist, echoing some of the points made by Aima.

At the Hedge Fund Standards Board (HFSB) chairman Antonio Borges was "surprised at some of the proposals contained in this directive given the efforts already underway to develop a new architecture for the world financial system".

Like Aima, HFSB said it was concerned that the draft directive "opts for prescriptive norms in contrast with the principles-based approach under which the industry developed in the UK. It would empower the Commission to issue detailed regulations, in effect sidelining national regulators. It would also force non-EU countries to approve equivalent regulation if they want to maintain access to the European market."

One London-based law firm active in the hedge fund industry said the report was "clearly targeted at the UK" and was "politically motivated".

In the US a rather muted response from the Managed Funds Association (MFA) merely stated the organisation was concerned "about certain aspects of the directive, including those that could potentially establish minimum capital requirements for managers. We would also urge that any reporting of information include appropriate confidentiality of certain information for fund managers."