Almost half of all hedge funds would no longer be available to European investors if the EU alternative investment fund managers directive's current proposals were enacted.

A report by Charles River Associates (CRA) commissioned by the UK Financial Services Authority (FSA) estimated 40% of hedge funds could not be sold in the EU. The hedge fund sector is the hardest hit by the commission’s draft directive. Only an estimated 35% of private equity funds and 19% of venture capital funds would be unable to be sold.

CRA said the one-off cost for the alternative investments industry of implementing the directive would be €3.2 billion (£2.9 billion) with ongoing costs of €311 million (£283 million). The report said those ongoing costs would be passed on to investors.

These estimates are higher than the £1 billion cost estimated by think tank Open Europe in a study released in September.

CRA said hedge funds would shoulder €1.4 billion (£1.3 billion) of the one-off cost - more than other sectors - but ongoing costs of €27 million (£25 million) would be less than the private equity and venture capital industries.

The report noted that depositary liability would add to increased costs but this was not quantified.

In a discussion on systemic risk, leverage and hedge funds, CRA said hedge funds were not the cause of the recent financial crisis.

But it added that hedge funds "do appear to have contributed to the transmission of systemic risk as declines in asset values caused leveraged hedge funds to sell assets as a result of margin calls and investor redemptions which caused asset values to fall further still."

CRA said the decline in hedge funds' market position was "non-trivial" in terms of its impact on financial markets.

"Provision of information on leverage to competent authorities is expected to bring benefits from improved monitoring and macro-prudential oversight and can also be used to identify whether or not trends in hedge fund activity increase systemic risk in the future," the report added.

CRA said investors into all types of alternative investments would be affected by the directive in both costs and choice of funds.

"The Directive will cause a fundamental re-organisation in the business model of global fund mangers (with significant one-off costs) and may lead to costly changes of legal structures and domicile. It also brings costs associated to valuators and depositaries which do not seem to be matched with benefits for at least some of the fund types considered," the report concluded.

Research for the report included interviews with major investors, fund managers (Blackrock, Brevan Howard), the London Stock Exchange, service providers and industry associations including the Alternative Investment Management Association (AIMA).