Proposed regulations for the alternative investment industry could harm investment returns for institutional investors unless substantially redrafted.

This is one of the conclusions in a report* by consulting group Mercer in response to the draft directive regulating alternative investment fund managers.

Regulations are too prescriptive, said the report. This made them potentially costly and complicated to comply with and could lead to an exodus of managers from the European Union (EU). Such an outcome would dilute the overall quality of providers.

Draft regulations imply institutional investors based in the EU could be prevented from investing outside the EU, reducing choice and competition.

Pension funds think the industry needs improvement and better supervision, said the report, although the need for choice and value for money is also essential. Such investors are worried that "restricting the pool of alternatives managers will limit their options for achieving returns and diversifying their investment portfolios," commented Robert Howie, alternatives researcher at Mercer.

The report urged the Commission to consider the range of regulatory approaches outside the EU before requiring other countries to adopt the EU's approach to regulation and supervision. Areas where investors think the industry needs to improve are not limited to Europe. New rules should reflect the global nature of the industry, concluded the report.

"Given the complexity of the issues that are being addressed and the international nature of the industry it is essential that this piece of legislation better dovetails with the work being done by other national and international bodies," noted Tom Geraghty, European head of Mercer's investment consulting business:

* "Improving and Regulating the Alternative Investments Industry" from Mercer, a wholly owned subsidiary of Marsh & McLennan Companies.