The Effects of Adoption of Directive ISA Part.I

Recently adopted by the European Parliament, the directive will come into force ISA in January 2011. All decisions taken under the ISA is a turning point for the industry of hedge funds because of restrictions imposed.


The national authorities of EU countries have a period of two years to transcribe those rules in their legislation, particularly on the issue of the European passport. However there is already fairly immediate impact in some areas. This is particularly the case for compensation in hedge funds and development of a new market, the UCITS alternative points on which we intend to return.


The compensation of hedge funds is generally of the type "2 / 20," that is to say 2% management fee and 20% of the outperformance retained by the manager. In terms of compensation, important work had already been conducted during the update of the directive regulating the implementation of Basel II (CRD 3 - Capital Requirements Directive - adopted by the European Parliament in July 2010). Its conclusions were largely contained in the Directive ISA. The main change is to align the distribution of salaries on the level of risk and lifecycle funds managed, and this with special attention on the variable. It found that 40% to 60% (depending on its size) of the bonus will be deferred over a period of 3 to 5 years and at least 50% should be distributed in shares themselves kept for a minimum period. Thus, for a variable compensation of € 100 K, a maximum of € 30k will be paid in cash the first year. Moreover, in case of negative performance of the fund, the amounts paid by the fund to employees may be partially recovered through mechanisms of penalty. The directive was not set up a ratio between the fixed and variable, merely specify that the two must be balanced, and fixed high enough to allow the non-payment of a variable, which guarantee payment is now banned. Because of work already conducted in CRD 3, Directive already provides a great level of detail through an appendix describing the new remuneration arrangements.